Negative cash flow probably causes more construction companies to run into financial trouble, often leading to bankruptcy, than any other cause. Even a profitable project can cause contractor’s financial problems if the cash flow is negative.
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?
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The opinions expressed in the attached articles are those of the writer. It should be noted that projects are varied and different laws and restrictions apply which depend on the location of the contractor and the project. It's important that the reader uses the supplied information taking cognisance of their particular circumstances. The writer assumes no responsibility or liability for any loss of any kind arising from the reader using the information or advice contained herein.
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