With today’s dwindling profit margins and shrinking credit lines, taking a proactive approach to cash flow management is more than a standard business practice—it’s essential to economic survival.
Inadequate cash flow kills more construction companies than poor profitability. Fortunately, there are many ways to improve how cash flows in and out of a business.
Step 1: Review Billing Format and Schedule of Values A contractor’s best opportunity to improve cash flow is to modify its schedule of values and billing process to meet a specific project.
Adding early project activities to the schedule of values can provide an immediate boost in cash. In addition to including mobilization, submittals and shop drawings in the billing format, contractors should break out large material purchases as separate line items in order to get paid as soon as the material arrives onsite.
Before a job begins, contractors should ask about the owner’s billing format requirements so their invoices meet the specifications. To further expedite payment, contact the owner after sending each bill to verify receipt. Ask when payment is scheduled to be made, and follow up if it isn’t received within the specified time frame.
Step 2: Restructure Subcontractor and Vendor Pay Schedules
Proactively designing subcontractor and vendor pay schedules is another way to improve cash flow. The objective is to integrate these pay schedules into the general contractor’s billing format so cash coming in covers cash going out. Establish a subcontractor retention policy to provide a financial “hammer” to facilitate rapid punch list and closeout completion at the end of the project.
Contractors also may want to provide financial incentives for completion of upfront activities like submittals and shop drawings.
Step 3: Streamline the Submittal ProcessSubmittals often hold up initial project billings. Streamlining the process can significantly improve cash flow. First, create a detailed submittal log and break submittals down to match the contract specifications. Then, coordinate the required submittal dates with the project schedule to maximize early billings.
It’s also a good idea to designate the party responsible for each submittal line item. This helps contractors hold subcontractors accountable for their part in the process.
Step 4: Improve Change Order Processing Time Change orders can be good for profitability and cash flow if the process is well-managed. To improve change order processing time:
- use project pre-planning to identify potential changes early;
- initiate a potential change order as soon as a possible issue is identified; and
- attach supporting documents to change requests to expedite approval.
Once a potential change order is approved, immediately convert it to a change order for billing.
Step 5: Maintain current Compliance Documents
Although managing compliance and administrative documents is a standard part of day-to-day operations, letting an insurance certificate lapse or failing to issue a lien release can delay payment.
Establish controls to ensure all contractual documentation, including daily field reports, safety documentation, certified payroll reports and fringe benefit statements, are up to date.
Step 6: Punch Early and Often
No matter how well a job has gone, its success likely will be measured by how well the punch list and closeout are handled.
Long punch lists eat up profit and delay final payments. Because of this, contractors need to punch early and often. Don’t wait until the end of the project to address issues. Make periodic punch lists every few hundred manhours to resolve issues early and eliminate closeout delays.
Step 7: Expedite Closeout
At the end of most projects, a significant portion of cash will be held by the customer as final payment, retention or both. How fast this money is released depends on how efficiently a contractor manages closeout. To improve project closeout:
- start early—much of the closeout docu-mentation can be completed once the submittals are approved;
- communicate regularly with subcontractors, vendors and the project team about outstanding closeout items; and
- use financial incentives to encourage subcontractors to make closeout a priority.
By starting closeout early, the last step before collecting final payment is providing operation and maintenance manuals, as-built drawings and training documentation.
Predicting and Controlling Cash Flow
In addition to following these steps, routinely creating cash flow projections allows contractors to better predict—and control—how cash flows in and out of their business. Even if a cash flow problem doesn’t exist, implementing these best practices could mitigate a problem in the future.