Negative cash flow is when the contractor is paying money to suppliers, equipment hires companies and subcontractors, or in wages and salaries, before the client has paid for the work that has been completed.
Unfortunately, most construction projects are cash negative to some extent. Many clients hold 10% cash retention until the end of the project when this is reduced by half and the balance may be paid months later. Consequently, if the project is priced with a profit of less than 10% then the project will be cash negative until the end.
In addition, most clients only pay the contractor thirty days after the contractor submits an invoice. These invoices are normally submitted at the end of each month. Many contractors pay their workers fortnightly or in some cases weekly. This could mean the contractor has paid out up to seven weeks of wages before the client pays for the work that these employees have completed. Smaller contractors sometimes have to pay suppliers before they will release materials, yet the contractor’s client only pays for these materials after they have been fixed in place – and then only 30 days after the contractor invoiced for the work.
There are, however, a number of other factors that make the cash flow situation even worse. Many projects have payment terms longer than thirty days. In addition, some clients habitually pay progress claims late. Of course, the ultimate knockout blow for many contractors is when clients don’t pay at all. This could be a result of the client disputing the value of work, defaulting on the contract or going into liquidation.
Yet, even with the odds stacked against construction companies, they often make their cash flow situations worse by submitting their progress valuations late, accepting payments late or not claiming fully for completed work.
How can contractors improve their cash flow?
- Submit monthly progress valuations before the due date. These must be in the correct format and include the required supporting documentation. Check that the client has received the claim.
- Follow up to ensure invoices are paid on time.
- If interim valuations are made when milestones are achieved then ensure that all work and documentation required to meet the milestone is completed as soon as possible. Frequently contractors are 99% there, but a missing certificate, or outstanding punch list items, hold up final completion. Literally, a few hundred dollars of outstanding work is holding back a payment of hundreds of thousands of dollars!
- If the progress valuation is made according to the percentage of work completed as recorded on the progress schedule, then ensure that the schedule has been updated correctly. Why get paid less than you are entitled?
- Submit and agree on variation claims as soon as possible. Clients don’t pay variation claims until they have been agreed. That argument over the last few hundred dollars in your variation claim may be delaying you receiving payment for it.
- Always check that the client has issued the correct site instructions and order amendments. Again clients won’t pay for variations until a variation order has been issued.
- Many clients hold retainage money which is only released when the project is completed. Ensure that all work required for project completion is done as soon as possible. Outstanding documents could prevent the project from being completed.
- Ensure that there aren’t large amounts of materials lying on the project. Normally clients only pay for materials once they are built in, yet, the contractor has to pay the supplier when they are invoiced, which is usually when the material is delivered. Try and time materials to arrive just in time.
- Avoid delivery of expensive items near the end of the month. Suppliers normally invoice at the end of the month during which the materials were delivered. An item delivered on, say, the 28th of the month will be invoiced at the end of the month (the 30th or the 31st). If the item is delivered 3 or 4 days later on the 1st of the following month then the supplier usually invoices at the end of that month. In effect, delaying the delivery by a couple of days will result in the supplier being paid a month later.
- Try to get expensive items built in as soon as possible, and certainly before the progress valuation is prepared. Getting an item in a couple of days quicker may just mean it’s paid a month earlier. Let the team know why it’s important to build the item in.
- ....Continue Reading.....
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