Smaller construction companies and regional builders face unique challenges during times of economic volatility. Their work is capital-intensive and projects have long timelines – meaning that price increases, interest rate fluctuations, supply chain disruptions and changes in fiscal policy all have an outsized impact on the money side of the business.
The biggest part of that impact is a chronic worry about cash flow. A study by U.S. Bank found that 82 percent of business failures result not from issues of demand or profitability but from cash flow problems – and that’s across all business sectors. Among builders, the percentage is likely to be even higher.
So the key to navigating safely through periods of economic uncertainty is, more than anything else, careful management of cash flow. Here are some best practices:
Smaller construction companies and regional builders face unique challenges during times of economic volatility. Their work is capital-intensive and projects have long timelines – meaning that price increases, interest rate fluctuations, supply chain disruptions and changes in fiscal policy all have an outsized impact on the money side of the business.
The biggest part of that impact is a chronic worry about cash flow. A study by U.S. Bank found that 82 percent of business failures result not from issues of demand or profitability but from cash flow problems – and that’s across all business sectors. Among builders, the percentage is likely to be even higher.
So the key to navigating safely through periods of economic uncertainty is, more than anything else, careful management of cash flow. Here are some best practices:
Seek better terms on new business: Try to structure contracts so clients pay an initial deposit to cover material costs and project startup, followed by regular payments as work progresses. You won’t always win this fight, but each time you gain a concession, it improves the stability of your business.
Use electronic payment systems: Electronic invoices get delivered sooner and electronic payments get credited faster. If nothing else changes, moving from paper and mail to electronic payments can cut a week or more off the payment cycle, which can make a big difference when cash is tight.
Penalize late payments: Implement late-payment penalties and enforce them. Many companies simply don’t care whether you get paid on time until they’re confronted with the first late fee.
Handle change orders aggressively: Change orders cost time and money. If you don’t already have an effective internal process for managing change orders, now’s the time to build one. The internet provides ample tools and resources for improving the change-order process. And every advisor will tell you to:
Make sure to understand the initial contract terms so you don’t get stuck paying for costs related to changes.
Get it in writing, with clear terms on scope, cost and payment. These terms should be consistent with the processes established in the initial contract.
Deal with change orders immediately, and push approvers to do the same. Trimble Construction, a provider of engineering software, suggests “… change orders should have a 30-day maximum turnaround. Contractors should submit an appropriately prepared quotation within 15 days, and owners should approve/reject within 15 days.”
Be entitled to overhead and profit on changes.
Keep the pressure on to negotiate final terms as quickly as possible if project timelines demand a change before the approval process is complete.
Make use of mechanic’s liens to establish a legal claim in the case of disputes, non-approval or nonpayment of change orders.
Know the filing deadlines and requirements for your state; mechanic’s liens are regulated at the state level.
Avoid adding overhead, and cut it where you can. There’s an old saying in business that you can’t cut your way to growth.
Though it may be true, growth tends to make short-term cash flow worse. There are a couple of reasons.
First, every dollar of cost reduction adds a dollar of profit while improving cash flow – at least in the short term. But at a 15 percent profit margin, a dollar of new revenue only adds 15 cents of profit. To put it another way, $1 in cuts has the same bottom-line impact as $6.67 in new revenue.
Second, taking on new business means putting out cash right away for labor and supplies, while the revenue to pay for it may not come for months. That’s a drain on cash flow.
Obviously, you can’t cut forever and still have a functioning business. And you always need to be on the hunt for new customers and new projects. But if the goal is to navigate uncertain times, maintaining healthy cash flow is the most important job. Cutting unnecessary expenses and being cautious about the terms of new projects can only help.
Monitor expenses aggressively: Use construction management software to track costs against project budgets. Check it frequently and make immediate adjustments when expenses get out of line.
Sweat the takeoff: Take extra care in calculating material requirements for takeoff, and order only what you need. Order supplies in phases so your cash isn’t tied up in materials that are just sitting around.
Lease rather than buy: If it’s time for new equipment, consider leasing it to avoid the large upfront investment of important cash reserves.
No panic bidding: Don’t underbid on projects just to bring in work. Make sure each project is profitable on its own terms.
Best Supply promises competitive pricing, reliable delivery and takeoff assistance so you don’t pay for anything you don’t need. See how we can help with your next project. Request a quote here.