In an industry that requires heavy machinery, calls for a large amount of manpower, and in which it isn’t unusual for clients to pay 90 days after a project is completed, cash flow problems are inevitable for construction and field services. Not to mention, the space is highly regulated and scrutinized, causing unexpected expenses and fees to pop up frequently.
Contrary to common belief, cash flow issues affect all kinds of construction companies—not just the small ones. No matter how established your organization is, one late client payment or missed variation claim could result in your needing to take out a risky business loan or missing a project deadline—souring client relations or leading to further financial woes.
Contrary to common belief, cash flow issues affect all kinds of construction companies—not just the small ones.
So, where’s the money tied up? In construction, some common events that negatively impact positive cash flow are late client payments, unexpected expenses like insurance fees or citations, variation claims and change orders. Whether you’re a general contractor or a subcontractor, there are certainly things that are out of your control when it comes to cash flow, but there are also a number of precautionary steps you can take to reduce the damage these problems can cause to your business. Here’s how to keep your balance sheet in order.
#1. Get change orders in writing.
Believe it or not, rework that’s done to address mistakes makes up 30 percent of the total construction work across the industry. It comes as no surprise then that change orders are common in construction contracts, particularly for subcontractors, who are usually responsible for taking on the bulk of project expenses. Occasionally, it might seem fitting to verbally agree to changes on a project brought on by the client or general contractor. No matter what the circumstances are, be sure to always have additional work and the compensation for that work in writing and approved. This way, you’ll safeguard your company’s financial livelihood no matter what happens along the way.
#2. Send a preliminary notice.
If you have a party that’s dragging their feet on a payment, consider submitting a preliminary notice. A preliminary notice, or NTO (“Notice to Owner”), is a message letting the party know you reserve the right to file a mechanic’s lien in the event of non-payment. This will put your payment at the top of the pile for the client, general contractor or other entity that’s withholding cash from you.
Without providing the correct documentation, numbers and figures in all your invoices, you’ll be prolonging the application for payment process.
#3. Keep organized records.
Without providing the correct documentation, numbers and figures in all your invoices, you’ll be prolonging the application for payment process. Don’t give the client any reason to not pay you. If an item is missing altogether, illegible or inaccurate, it gives them leverage to withhold compensation from you. By keeping detailed records and airtight invoices, you can help decrease the chances your cash flow hits a wall.
#4. Use tech to save time and money.
Another way to stay on top of cash flow is better manage the business expenses you already have going on—particularly by more accurately bidding on projects, cutting back on overtime hours, avoiding overstaffing projects and paying only for hours actually worked. You’ll be amazed at how much money and time you can save by getting rid of inaccurate paper time cards and inefficient processes.
Here at ExakTime, our industry-leading workforce management solution provides all of this and more for customers. Our users typically save thousands of dollars per pay period using ExakTime, freeing up cash to invest back into their businesses. To hear what our users have to say about our services, you can read more on our Testimonials page.
#5. As a last resort, take out a loan.
Business doesn’t wait for your cash flow problems to be fixed. Overhead costs, ongoing payroll, equipment costs and other day to day expenses will continue to pile up as you wait for the dust to settle. If you find yourself in dire straits, taking out an emergency loan can be your last resort. Third party lending tools like Kabbage, BlueVine or even traditional banks can help ease the financial load in the meantime. This can keep things running smoothly at your business while you wait to get paid.