Negative cash flow probably causes more construction companies to run into financial trouble (leading to their closure) than any other cause. Even a profitable construction project can cause a company financial problems if the cash flow is negative.
Negative cash flow is when the construction company is paying money to suppliers, equipment hire 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 usually cash negative to some extent. Many clients hold 10% cash retention until the end of the project when this is reduced by half. Consequently if the project is tendered at anything less than a 10% profit the project is usually automatically cash negative until the end of the project. 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 means the construction company could have paid out up to seven weeks of wages before the client pays for the work that these personnel have completed. Smaller contractors sometimes have to pay suppliers before they will release materials. There are, however, a number of other factors that make the cash flow situation even worse. Many construction projects have payment terms longer than thirty days. In addition some clients habitually pay progress claims late or not in full. Of course, the ultimate knockout blow for many construction companies 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. To improve the cash flow situation construction companies must submit their monthly progress valuations on or before the due date. Some clients only run progress payments on a particular day in the week, or month, so missing a submission date could cause the client to delay payment by up to a month. The valuations must be submitted in the required format and with the required supporting documentation since many clients will use any excuse to delay or reject a monthly claim. It’s important to track the progress of the payment through the client’s payment system. With major clients there may be several people that check and approve the valuation and payment. Sometimes, the process is disrupted when someone is absent, or the claim simply gets ‘lost’. I’ve had more than one client who consistently paid progress claims late, always with some excuse about our valuation being late, the claim being incorrect (either arithmetic errors, insufficient supporting documentation or disagreement with our progress) and people in the approval process being absent. Of course many of these problems were only reported to us when the payment was due, despite the client having had the claim for thirty days. Some contracts are structured such that payments are only made when the contractor achieves particular milestones. It’s important that Project Managers understand what these milestones entail and ensure they are met. It’s obviously pointless to achieve 99% completion if payment is only made for 100%. Often contractors take several weeks to complete the last few items (which may just be completing documentation), which delays payment. In forth coming articles I’ll suggest other steps that construction companies can implement to improve to improve their cash flow. 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 Thank you for reading this article. I hope it was useful. Please add your comments and share it with others. (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) construction management construction project management
12 Comments
Jonathan Hall
17/4/2015 10:37:59 am
Paul , great article. Enjoyed your book. Regards Jonathan
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Redemptus Rudi
10/10/2015 07:57:37 pm
your article is very helpful for the offender in the world of construction management.
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Christina
11/10/2015 01:31:41 pm
Excellent article - and very true! will be reading all the archives and purchasing the book
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Paul
11/10/2015 02:57:08 pm
Thanks Christina, I hope you find the other articles useful. Please share the website with others. Regards, Paul
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Gaurav Bhandari
12/10/2015 12:56:13 pm
Good article and valid points highlighted.
Reply
12/10/2015 08:24:34 pm
Great article very true these are the very issues that are the battle to stay viable
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Nabeel
18/10/2015 02:49:32 pm
Very insight outlines. I will add this blog to my favorites and frequently visit it. I'll also advise my colleagues to visit it.
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Stephen
18/12/2015 12:56:26 am
Good comments,congratulation my friend...
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Eric
4/1/2017 09:38:32 am
Im just a student that is going to graduate but this is an amazing article. taught me alot even before i experience working life. Thank you!
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Paul
4/1/2017 07:30:35 pm
Hi Eric, thanks for taking the time to add your comment. I'm pleased you found the article useful. Please read some of my other articles. I wish you a very successful construction career.
Reply
Vincent
13/9/2017 07:19:38 pm
it has heiped me a lot to understand the danger of submitting monthly progress valuations late
Reply
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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. "I have what I consider some of the best books on construction management."
Books are available from: Amazon.com Amazon.co.uk takealot.com kalahari.com Amazon.in Amazon.de Amazon.fr Amazon.it Amazon.com.au Powell's Fishpond uread bokus Amazon.ca Amazon.es Other retail stores Available in paperback or on Kindle "28 YEARS OF CONSTRUCTION PROJECT MANAGEMENT EXPERIENCE, DEVELOPING SUCCESSFUL CONSTRUCTION PROJECT MANAGERS AND BUILDING SUCCESSFUL CONSTRUCTION COMPANIES"
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