What best practices do you recommend to help construction firms weather an economic downturn?

Craig S. Pate
CPA, Partner
Wilson Lewis

Ensuring best practices are followed is essential to the financial health of a construction company. A consistent, conservative cash flow approach will serve the company well in both good and bad times. Here are a few key strategies that can be particularly helpful:

• Adopt a dynamic cash flow model that allows for scenario planning. If variables can be changed to align with current business reports it will result in a more reliable cash flow estimate. A dynamic cash flow model will also allow for “what if” scenarios that executives can use to make long-term decisions. Knowledge is power, and when armed with reliable knowledge from a dynamic financial projection, contractors can better prepare for what is to come.
• Accepting electronic payments is simple. Cashless payments are easy ways to limit exposure to the virus. The healthier staff is the less disruptions will be faced by the business. If customers can pay electronically, the sooner that cash is available to invest in new projects or pay down debt. To shorten the cash conversion cycle, it may be necessary to adjust your payment policies. Consider changing policies to net-60 or offering incentives for early payment.
• Pay attention to new tax strategies and adopt the ones that make sense for the business. It is possible to uncover new tax credits and deductions, and it may even be possible to defer tax payments. Tax deferral strategies, like electing bonus depreciation, can be great lifesavers when cash is short at hand.

Contractors should always prioritize cash, but it is especially important when markets take a turn. As we have seen these past few months, there is no way to predict future revenue streams with certainty, so your business needs to be prepared for anything.

Carl Oliveri
Construction Practice Leader
Grassi

Cash flow should be on the top of every contractor’s mind during an economic downturn. Cash is always important, but never more so than when you’re faced with major changes to your revenues and expenses. Prepare a rolling 13-week cash flow projection to assess your company’s financial position and make confident financial decisions.

Recognize that the economic impact will be also be felt by your customers, and openly communicate with them to understand their ability to pay. Evaluate the impact that stalled projects and backlogs will have on your revenues. If the downturn is caused by a crisis like COVID-19, expenses will also rise. Factor the added costs of project remobilization, staggered shifts, new health protocols and increased insurance costs into your cash flow projection.

During an economic downturn, workforce management is also key. While it is never ideal to lose any employees – especially in an industry plagued by labor shortages – it may make the most financial sense to furlough or terminate a certain portion of your workforce. Other strategies include pay reductions, salary reductions or forced use of paid time off.

Finally, be conservative in taking on new jobs. While you may want to jump on the first job that becomes available, it will not be profitable if your company doesn’t have the skills, technical proficiency or experience required to succeed in a new niche sector and comply with its unique regulations.

Timothy T. Wilson
National Industry Partner
BKD CPAs & Advisors

Construction firms learned many lessons from the economic downturn that began in 2008 and carried over into 2011-12 for the construction industry. These lessons learned are playing out again, with many contractors working off their backlogs, yet seeing a noticeable decline in new bookings, which is raising concern about volume in 2021. Some of the best practices that we continue to see include monitoring overhead levels to match volume, investing smartly in people and technologies and focusing on business development activities. While it is important to avoid chasing work, contractors should look to capitalize on expertise and opportunities to expand geographically. The fundamentals of good business practices are always highlighted in an economic downturn, including monitoring cash flow, accounts receivable and margin. One area that can have a tendency to slip in good economic times is prequalification of owners and subcontractors. Financial pressures at the owner level and subcontractor level can go unnoticed until there is a problem, and proper evaluation at the prequalification stage can help mitigate future issues during an economic downturn. Many construction firms have built strong balance sheets to reduce the risk associated with a downturn, but paying attention to the fundamentals will be critical to mitigating the impact of the downturn.

Tim Cummins
Partner
Aronson LLC

There is more economic uncertainty in the construction industry than ever before as a result of COVID-19. Contractors should manage their companies with much more discipline surrounding financial and operating efficiencies and should abide by some of the following suggestions.

• Conserve and proactively manage cash: Strengthen your disciplines to judiciously manage cash flow and build reserves. Relying on available lines of credit is not effective cash management. However, continually projecting cash flow for six to eight week periods while managing the operating budget and adding cash to reserves are efficient cash management strategies.
• Improve operating efficiencies: An aggressive cash management program will lead to uncovering financial and operational inefficiencies that can yield additional cash flow. Actions to increase cash flow include accelerating accounts receivable collections, settling contract disputes, selling underused assets, enhancing labor productivity, improving site material management, reducing discretionary/overhead expenses, and tightening accounts payable/subcontractor management.
• Focus on productivity: Contractors should be cognizant of further workforce disruptions and productivity losses. Even without a pandemic, productivity reviews often yield immediate improved cash flow.
• Stress communication: Create a culture that is clear about improving cash flow and maximizing operating efficiencies.
• Improve tax management: Take advantage of recent attractive tax law changes that include opportunities to improve cash flow.
• Focus on the future: Aggressively market the company and pursue technology investments that will improve productivity, controls, and more timely and accurate management reporting.

Assessing your company’s current condition can be helpful in making decisions that are paramount to the future success of your construction company.

Phillip Ross
Partner
Anchin

During these unprecedented times, it is important for construction companies to identify and build upon core competencies, prioritize internal operations and efficiencies, and create cash reserves wherever possible. Businesses with flexible cost structures and good cash balances were able to adjust more easily than others over the past few months. Companies with sufficient financing programs and the availability to leverage additional credit will be in a much better position during these times.

A good rule of thumb is that you should be able to cover your fixed costs and overhead for a few months with your cash on hand. Some ways to find cash are by monitoring receivables more closely and collecting on overdue accounts, filing mechanics liens when necessary, negotiating longer payment terms with suppliers, and applying for loans through government programs like the Paycheck Protection Program and Main Street Lending Programs. Payroll tax deferrals and Employment Payroll Tax Credits are also tools to build up cash reserves during challenging times.

Updated budgets based on the most current information are a must as well as is developing alternative scenarios to manage and plan effectively. It is also imperative for companies to have timely internal reporting to monitor actual versus budgets to enable your company to be in a position to make smart and timely decisions.

Finally, it is extremely important to solidify your bank and surety relationships, since good relationships with them are crucial for your business even in good times. Contractors with longstanding partnerships with banks and sureties know that they will have the support of these banks and bonding companies to help them successfully navigate these economic times.

Reed Sellers
Partner
Wipfli

In times of turbulence, like the COVID-19 pandemic or economic downturns, what were once best practices often become necessities for survival.

Cash flow projections are key and will let you know where to focus your efforts. Because contract cash flows are generally the driver, preparing a schedule of cash flows by job will allow you to know which jobs are helping and which are hurting.

Track costs and schedule impacts associated with COVID-19. The current pandemic is causing additional costs and delays that could not have been predicted as recently as a few months ago. These costs which were once all together unique may now be the new normal and therefore need to be incorporated into all future projects.

Have a contingency plan for any key materials, and don’t assume that any supplier will be exempt from supply chain disruption. Project delays are costly, but a little due diligence can go a long way.

Be proactive about obtaining approval and submitting change orders. Many contractors lose out on change order opportunities due to not understanding what is out of scope, lack of documentation, and missing notification deadlines.

Finally, understating your indirect costs and allocations thereof is vital. In an economic downturn, the numbers of bidders go up and gross profits go down. If you have a strong grasp on your indirect costs, you will know what a project is going to cost and can modify your bid as need be.

Shane Brown
Partner, Construction Practice Leader, Rocky Mountain Region
Plante Moran

Companies that are successful in the next several years will be those that take a step back today and ask themselves, are we being strategic? Ask yourself: What will our target markets look like in the next five years? What are our core strengths in each of our markets and service offerings? What new opportunities exist in the coming five years where we’re best or least equipped to capitalize?

Your management team needs to conduct a fair amount of internal and external research. This planning can be done iteratively in several sessions, as the answers will require thought and research. From these questions and answers, companies should be looking to best align and direct their strengths to where they think the most opportunities will lie. Companies may also need to add strengths to fully capture new opportunities.

During the last recession, contractors who focused on building a diversified portfolio, stayed disciplined in selling only up to targeted amounts of work, and directed their talent to a wider array of sectors than in the past not only survived, but their businesses thrived during and following the recession. These companies adjusted their strategy to respond to opportunity in traditional sectors, while also keeping a presence in each target sector without having to sell out to low or no-profit backlog.

Best-in-class contractors excel at reinvention because they continually identify where future opportunities will be and redirect their current talent into those areas. They also seek out solutions for those areas of opportunity where current talent is light and make the hard decisions to move away from traditional areas of strength that don’t look strong in the future.

Joseph Natarelli
National Construction Industry Group Leader
Marcum LLP

Positive cash flow is the lifeblood of your construction firm. Can you trim any of your general and administrative expenses? Do you have outstanding accounts receivable? Now is the time to collect on them. Make sure owner funding is secure at the start of each project so that you will be paid timely. If you don’t have a line of credit, now is the time to get one—even if it isn’t currently needed. Evaluate current loans and term them out as long as possible to preserve working capital. You may be able to negotiate new loan terms or extend a loan.

During difficult times, contractors often compete for work that isn’t in their wheelhouse or chase work in other regions. Resist the urge to change lanes. You’re likely to make higher margins in your areas of expertise.

Be vigilant about reviewing financial statements to get a real-time picture of your cash flow. Keep tabs on any project changes by examining job cost reports, and make timely adjustments to rein in costs. Understand the terms of your contracts. Is there bonding if you don’t get paid? Escalation clauses can help offset rising material prices that can negatively impact your bottom line.

It is understandable that you are busy managing projects and looking for new work to strengthen your backlog. Consider working with legal professionals who can review your contract terms and accounting professionals who will track financials. Yes, it’s an expense, but it’s one that will save you money.

Steve Tenney
Construction Industry Consultant
BerganKDV

For many contractors, the past few years have been good, and some were trying to predict when the downturn was really going to arrive. Then COVID-19 hit, and everyone has been impacted. The ability to weather the downturn may be dependent upon the construction firm’s knowledge of their costs and the proactive steps they take to manage them and then price future work accordingly.

Direct labor costs could be impacted by productivity changes due to manpower availability, PPE and sanitizing processes and maintaining appropriate physical distancing, among other changes.

Direct material costs could be impacted by supply chain disruption which can impact production schedules, material cost escalations and even material availability.

Indirect costs including labor burden, equipment burden and overhead burden should also be evaluated to consider the impact of fixed and variable cost changes as a result of the downturn.

Accurate financial reporting is important and the impact on the work in progress should be updated to account for the change in the estimated costs to complete. Updating company budgets and re-evaluating overhead and discretionary costs should also be a current activity.

Communication with your financial partners is always important and added emphasis during challenging times is essential. This group includes project owners, subcontractors, sureties, insurance agents, lenders, attorneys, vendors, tax, accounting and business advisors.

What are best practices you recommend for contractors in managing their projects in the current environment?

Julian Xavier
Incoming, CLA Construction Managing Principal
CLA (CliftonLarsonAllen LLP)

During the COVID-19 pandemic, construction was deemed essential in most parts of the country and contractors have continued to work. This has been good news; however, the performance and efficiency of the work has changed. Best-in-class contractors recognize that completing a project is different today, and they develop strategies to help minimize any negative financial impact to the project.
Some practices include reviewing contract terms—especially related to delays, work suspension and termination—and understanding how these terms could provide financial protection from these potential situations.

Take a hard look at project schedules and timelines needed to obtain appropriate project materials (steel, stone, millwork, etc.), as the pandemic may delay delivery. Factor these potential delays into your critical path scheduling, then promptly share any expected impacts to the overall schedule with the project owner.

Additionally, recognize that basing cost estimates on similar prior projects may no longer be a reliable strategy in the present environment. Reassess the costs to complete your projects, focusing on new requirements around jobsite safety protocols. This should include looking at your labor staffing, how many team members can be on the site, and how their productivity could be affected, given any specific project restrictions. Consider the impact that the new safety requirements may have on your project costs and be sure to account for that impact in making new bids.

What advice do you have for firms to protect their businesses and financial systems from phishing, data breaches and cyber intrusions?

Jim Carpp, CISA, CRISC, CIRM, CISM
CHIEF DIGITAL OFFICER
Rehmann

Having a solid cybersecurity program in place is more important than ever for companies, many of which are experiencing data breaches at an alarming rate. The costs to businesses can be devastatingly high, too – a recent study of U.S. companies found that the average total cost of a data breach grew from $3.54 million in 2006 to $8.19 million in 2019, a 130 percent increase. The good news: the cost goes down when you have a strong cybersecurity program in place and implement such things as extensive encryption use, business continuity management, employee training, insurance protection, and board-level involvement. Assessing the state of your company’s information technology environment is a critical first step. This involves identifying critical data and where it is stored, developing and communicating an IT security policy, and ensuring a disaster recovery plan is in place, among other steps. Understanding your business and identifying your crown jewels – the sensitive data you have – and why people would want it will get you started on the journey of best protecting your business and financial systems. We also highly recommend companies get cyber liability insurance. As attackers become more sophisticated, you need to be as proactive as possible, recognize your vulnerabilities, and implement the tools, processes, and procedures necessary to reduce risk over time. Rehmann’s technology and cybersecurity consultants work closely with a business to build and implement a strong cybersecurity program. Connect with us at rehmann.com to learn more.

Rhett Ennis, CPA, MAcc, CCIFP
Principal, Construction Practice Leader
Berntson Porter & Company

Contractors must understand their risk of a data breach and implement best in class tools to protect themselves. We recommend utilizing a variety of cybersecurity tools at distinct levels of your firm’s operations – the most critical being the education of your employees. The vast majority of data breaches are due to human error, phishing or social engineering. Repeated training among your staff can increase awareness and reinforce better internal security practices.

Mike Ode
CEO
Payroll4Construction.com

Mobile tech is becoming more prominent on jobsites, and while many companies provide devices for their workers, often a cost-efficient solution is for employees to use their personal devices for certain tasks. All of these devices should factor into a business’s IT security strategy. Whether it’s securing the devices or specific apps employees use, keeping your data safe at every point of access is key.

One of the first, and easiest, steps to bolster your security is to implement basic training for employees, like how to spot a phishing email. If something in an email sounds “off,” whether the person sending it sounds different than usual or the request seems out of character, encourage employees to take the extra step and verify that it was sent from the correct email address, or give them a quick call to verify.

Similarly, make sure your team keeps track of any devices they use for work and password-protect those devices. All the security measures you put into place won’t help if an employee loses their device and someone can access your business’s information simply by opening their phone.

As part of your IT security strategy, take an inventory of the devices and applications your team uses, including the make and version of the operating system. Make sure your team knows to keep those devices and apps updated to patch any potential security flaws, and keep in mind that you can always outsource to an independent IT company for a full security assessment.

Elaine Ervin
Partner, Construction National Practice Leader
Moss Adams LLP

Within the last six months, I'm aware of two companies hit with ransomware that felt they had secure IT policies in place. More and more, we see construction companies targeted with various methods of ransomware. It's essential for companies to not become complacent about enacting strong IT policies. For those with plans in place, we recommend monitoring and testing continually. Technology changes rapidly, and sophistication of ransomware attacks evolves with it.

Companies should evaluate their IT environment and determine how systems, infrastructure, staffing, practices, and procedures can better meet the organization's present and future needs. Work with an organization that can help you understand your security needs and create a more robust IT security posture. Assessment, penetration testing, and employee education can help mitigate a breach down the road.

Louis Sandor III
Partner, CPA, CCIFP
WithumSmith+Brown

During COVID-19 and the New Norm, organizations’ attack surface has significantly expanded, especially with a distributed workforce and technology. While it may be common practice for some businesses, many construction companies are scrambling, and cybercriminals are ready, using working from home as their way into business networks.

As in-person meetings quickly changed to virtual, many companies are utilizing convenient online tools that can be very insecure, leaving cybercriminals a path to confidential information. Adapting to the new normal of business requires construction companies to evaluate their current cybersecurity measures as data breaches, phishing scams, and cyber intrusions are becoming more prevalent.

Companies should consider the below best practices as a start to protecting their data from cyberattacks:

• Offer cyber training to all employees: Although not a fix ,teaching the dos and don’ts of cyber awareness allows employees to understand how to use technology properly and mitigate risk.
• Beware of phishing emails: Be mindful of internal and external emails and suspicious links. Consider the possibility the sender was already hacked.
• Implement a cloud-based system: Saving files on a desktop or an office computer puts the information at risk for theft. Using a cloud-based solution allows the user to save documents and files securely, as the data is encrypted.
• Keep software systems updated: keeping your software systems and firewalls updated creates a preventive measure against cyberattacks. Outdated systems can leave security holes and accessibility to cybercriminals.

How important is it for general contractors to reassess the financial health of their subcontractors in the current economy?

Larry May
Partner
Carr, Riggs and Ingram CPAs and Advisors

During my 25 years in construction accounting, I have learned that the most vulnerable companies fail during economic downturns. Sadly, it is not always easy to identify your most vulnerable subcontractors. I’ve seen older established companies fail due to one bad job that entirely depleted their cash reserves. I’ve seen other well-established businesses fail due to family issues such as death, divorce, or even addiction. It is common for newer companies to struggle with staying afloat because they either have not experienced a downturn before and are unsure of what is needed to survive, or they didn’t act quickly enough in a time of uncertainty. Other causes include having contracts that are suspended or canceled or experiencing labor issues due to health matters—all of which deplete cash flow. Because of this, general contractors must reassess the financial health of their subcontractors during times of economic uncertainty. These assessments are even more critical if the subcontractor is not bonded. However, bonded or not, the delay caused by a failed subcontractor can be detrimental to any project. The construction schedule is impacted, overhead costs increase during delays, and profits are lost on the overall job. To ensure a subcontractor’s health, companies can ask for recent financial statements, request a letter of credit from their bank, and inquire about performance on other jobs from different contractors. A best practice for general contractors is to always maintain open lines of communication with their subcontractors.

Michael Ceschini
Managing Member
Ceschini CPAs

The financial strength of a project’s subcontractors directly impacts the ability of the general contractor (GC) to provide a quality project that is on time and within budget.

It is critical for GCs to have subcontractor prequalification programs in place in order to successfully manage subcontractors and reduce the risk of default.

Often times subcontractors do not have the adequate cash or bank lines of credit to handle delayed or extended payment terms from owners, changes in material costs, redoing poor-quality work, etc; so GCs should have their accounting team perform the proper due diligence by reviewing the financial strength of its subcontractors by doing the following:

• Review subcontractors’ financial statements or tax returns to evaluate their financial health.
• Verify that financial statements conform to Generally Accepted Accounting Principles (GAAP) — preferably audited by, or prepared with the assistance of, a CPA with construction experience. Extracting key ratios from the financial statements can help you gauge a subcontractor’s financial strength.
• As you review the financial information, pay particular attention to whether a subcontractor has enough cash to keep its business going, and that its accounts receivable are collectable. Make sure the owners are maintaining sufficient equity in the company.

If a GC’s due diligence indicates that a subcontractor presents a high degree of risk, that contractor might decide against doing business with that subcontractor. However, there may be steps a GC can take to manage the risk—such as requiring performance bonds or implementing contract value limits.

Linda Roberts
Principal
BerryDunn

General contractors generally work with subcontractors they have worked with in the past. However, strong historical performance and balance sheets do not necessarily reflect current fiscal status, management bench strength, or risk. We hear from sureties and bonding agents that recent subcontractor defaults tend to be with those subcontractors with whom general contractors have long-standing relationships.

State licensing agencies require contractors to submit financial and other information annually maintain their prequalification status. Contractors should perform prequalification renewal assessments of all significant subcontractors at least annually. In tough financial times like these, those assessments should happen even more often and include gaining an understanding of backlog, bonding capacity, job size history, and management and project manager succession plans, as well as an analysis of information contained in financial statements―complete with notes.

It is crucial that estimators and project managers ensure solicited subcontractors are currently prequalified and approved by management prior to bidding or contract award. This, in turn, means they should have read-only access to real-time prequalification assessments. Investing in an automated system to maintain assessment records―one that generates reminders for lapsed or soon-expiring pre qualifications―will help ensure these risk assessments are performed according to policy.

What are some common financial “bad habits” construction firms can easily avoid with some guidance?

Fred Ode
CEO & Founder
Foundation Software

For some firms, there’s a complacency when it comes to their data, and this can be as bad a habit as any to break. You might think that you’re doing enough by reviewing your status or financial reports on a routine basis, but if you’re just looking at them and not figuring out what your numbers are telling you, you’re wasting your time.

Battling complacency is about changing how you evaluate the information you’re looking at, and COVID-19 has certainly changed how owners should evaluate their businesses. Pre-pandemic, it was acceptable to overlook occasional inconsistencies — the slight overrun or even weak quarter — but now, using your data to tighten up avoidable issues before they occur will be what separates the successful owners from the rest. It won’t be enough to settle for “OK” and write off these problems without actively fixing them.

Keep a close eye on your cash outputs. With COVID-19, it’s likely your spending has changed, but not always in a bad way. Expenses might even be less with employees working from home. Use your data to make projections on your cash flow and receivables and make efforts to improve these numbers instead of just hoping for a better month.

In the current climate, the owners that thrive will be the ones who take this as an opportunity to eliminate complacency. Business is a numbers game, and owners need to love their numbers so intimately that even the slightest changes don’t go unnoticed.

Chingis Akatayev
CEO
ComCard, Inc.

Given the nature of the industry, construction financials tend to be overwhelming, tedious, time-consuming and complex and can lead many great firms to make common, yet unnecessary, mistakes that cost them dearly. Here are a few ways to help avoid these missteps and mitigate losses. First, be proactive in monitoring all recurring payments to ensure unnecessary payments don’t go unnoticed. The quicker you identify mistakes, the quicker it will be resolved (saving you both time and money). Second, all investments, including advertising and marketing, should have a return on investment. Third, take the time to do your due diligence to ensure certain costs like office space are not overpaid. Finally, be cautious and proactive in monitoring debt, including credit cards, and do not forget to use their benefits to save more money. A lot of times, companies dig themselves into such a hole that they have a hard time getting themselves out.

John Rosch
Regional Sales Manager
Explorer Software

Many construction companies judge the performance of their projects and businesses based on their intuition and not on data. By relying on objective information and making decisions based on this you will be able to achieve better financial results. Create a budget for each project with the costs thoroughly detailed so that you can control your labor based on activity. Buy out your material purchases and subcontracts early in the project lifecycle and make written commitments consistent with the budget you’ve laid out.

As your business expands, the core staff you’ve always leaned on will require more of their work to be delegated to new employees. Create sound business processes that lead to more oversight, accountability, and predictable results. Requiring purchase orders for all material purchases and ensuring all subcontractors submit their required paperwork before starting a project can help manage your budget moving forward. Weekly project meetings and monthly financial meetings will allow for adjustments to be made prior to them creating permanent poor results.

All of this can be accomplished by using software that is built for the construction industry. Don’t waste time and resources developing reports in EXCEL that could be subject to human error. Take the long view when researching new software to ensure it can adapt as your business changes and grows over the next 10 years.

What unique challenges do construction firms operating across borders face, and what capabilities should they employ to address them?

Jeff Weiss
Chief Revenue Officer
CMiC

Every construction company that provides services in the international space faces an accounting challenge—varying revenue recognition and WIP methodologies in multiple currencies. The process is compounded when there is a shared balance sheet across national boundaries.

For instance, a company in Korea that would operate in KWN may have contracts written in USD. The WIP would normally be stated in the home currency of the company, but since the contract is in a foreign currency, the construction firm might need to simultaneously state the WIP in the contract currency.

While plenty of accounting solutions are built to handle international currencies and even WIP and revenue recognition, these solutions are typically universal across markets. They are not tailored to the unique activities of the construction space, which can create disconnects between financial and project management systems.

Case-in-point, the UK’s Construction Industry Scheme (CIS) is a tax program specific to construction work where general contractors deduct money from a subcontractor's payments and pass it directly to HM Revenue and Customs to ensure that tax is being paid by the subcontractors and that the tax deductions count as advance payments towards the subcontractor's tax and National Insurance bill. A purpose-built construction accounting software is designed to recognize these types of unique idiosyncrasies.

Your program management solution should be able to handle different accounting standards including GAAP/IFRS, multiple currencies, the revaluation of balance sheets based on currency exchange fluctuations and AP aging in multiple currencies—even as it supports your day-to-day project management activities.

As construction firms acclimate to a different way of working, what steps should they be taking to ensure prompt payment?

Kevin Booth, CCIFP
Chairman
CFMA

Communications is key to ensuring prompt payment. Due to COVID-19, many office staff are working from home, including accounts payable personnel. E-mail, or better yet, call your customers’ accounts payable contacts prior to billing to verify the proper billing procedures. These procedures may have changed due to work-from-home requirements. Make sure your customers know how to contact you if they have questions regarding your billing.

After your billing has been submitted, follow up to ensure the billing has been received and approved. To avoid any payment delay, verify the expected payment date for your billing.

What trends have you seen construction firms using in order to achieve prompt payment?

Jon Zeiler
Managing Partner, Construction and Real Estate Services
Crowe LLP

Construction firms must bill projects before they can be paid, so a rigorous and timely billing process on all projects in progress is essential, no exceptions. You would be surprised how many firms struggle with a consistent billing process.

From a general contractor’s perspective, we have seen companies negotiate hard on payment terms at the onset of the contract, either reducing the days until payment or building in an interest component into their bids for those projects with extended payment terms. In limited cases, owners are offering earlier payment if the general is willing to take a discount. Additionally, we have seen clients negotiating to obtain partial retainage payments earlier in the project and implementing proactive project closeout procedures to receive final retainage payments more quickly.

From a subcontractor’s perspective, the “pay when paid” clauses of most general contractors’ standard contracts have caused subcontractor accounts receivable days outstanding to increase significantly in recent years. Several subs across our client base have started taking a hard look at discounts to accelerate payment from the general. Subcontractor margins are healthy in the current market, so the slight decline in margin to accelerate cash flow has been worth the cost. Those early payments also remove the potential “pay when paid” issues down the road if the general and owner end up in a prolonged dispute. Additionally, subcontractors continue to push hard on the schedule of values to accelerate billings and stay ahead of the costs on the project.