Last week in my article ‘Negative cash flow – the death for many construction companies’ I discussed how negative cash flow can destroy a company. This article explores this topic further and discusses what steps Company Managers and Project Managers can implement to improve cash flow.
Case study 1: A few years ago I became involved in a project that had done ten million dollars’ worth of work on a cost recovery basis and yet had only invoiced for half a million dollars! Hard to believe! Not many companies can survive that amount of negative cash flow. To make matters worse none of the work had been signed off or agreed and many records were missing. It took months to find and agree the records and then invoice the work - (in all of this who knows what records were lost).
Case study 2: Another project we built had a value of eight hundred thousand dollars. However, from the outset there were delays and scope changes. The value of the project soon doubled. Although we submitted our variation claims timeously the client refused to acknowledge or pay them. After four months our costs were over one million six hundred thousand dollar and yet the client had only paid us eight hundred thousand dollars. Only when we proceeded down the legal path did the client eventually agree, settle and pay most of our claims.
These examples illustrate how not invoicing for work done and not settling variation claims can quickly get a construction company into cash flow trouble.
So what can we do to improve the cash flow on our construction projects?
1. Ensure that valuation claims are submitted on time, to the correct person, in the right format and with the required supporting documents. I’ve had many claims rejected because the format wasn’t as per the client’s requirements. It’s always a good idea at the start of the contract to clarify when the valuation claim must be submitted, to whom and in what format.
2. Make sure all work completed has been included. The person preparing the valuation should be familiar with the project as well as the project documentation.
3. Submit and agree variation claims as soon as possible so they can be included in the monthly valuations.
4. If the value of the work is going to exceed the original contract value ensure that the client has the funds to pay. Sometimes the client has to go through a long process to release additional funds for the project which could take months. I’ve worked for large reputable clients where it could take three or more months to release additional funds from within the organisation to pay additional costs. Three months when we weren’t paid. Continually update the client on the expected final contract value so if necessary they can take the required actions early.
5. Ensure that the client has issued proper site instructions and contract variations for the additional works so there are no delays with payment.
6. Some projects are only paid when a milestone is achieved. If the milestone isn’t achieved – maybe because documentation hasn’t been submitted or testing completed there may be no payment forthcoming. The project team needs to understand their contract documentation and ensure they fulfil all obligations for the milestone to enable payment to be made.
7. Some projects pay in accordance with percentages complete on the project schedule. If the schedule isn’t updated correctly the contractor may end up under claiming their monthly valuation.
Read part 2 next week for more actions you can take to improve the cash flow on your project.
Thank you for reading this article. If you found it useful please share it with your network. Please add your comments so we can all share your knowledge and experience.
Other useful articles by the author include:
Construction project variations – have you included all your costs?
What you need to know to close-out your construction project successfully
The construction project manager’s financial duties
The importance of maximising monthly valuations on your construction project
Financial checks and controls on construction projects
(Paul Netscher is the author of the acclaimed books ‘Successful Construction Project Management: The Practical Guide’ [a required text for Bachelor of Construction Management at some universities] and ‘Building a Successful Construction Company: The Practical Guide’. Both books are available in paperback and e-book from Amazon and other retail outlets. This article is adapted from information included ‘Building a Successful Construction Company’. To find out more about how Paul Netscher can do for your company Read)
©2015 Paul Netscher. This article cannot be used for commercial purposes without the written permission of Paul Netscher. The article cannot be reproduced without acknowledging the author.