Did you know the construction industry is notorious for the late payment of invoices? If you’re used to getting paid within 30 days of sending your invoice, you’ll find it challenging to accept 50 -75 days before you can turn the payment into cash flow.
Managing cash flow is crucial in the construction industry, as projects often involve significant upfront costs and payments may not be received until later stages.
Small businesses and subcontractors rely on cash flow to survive. In this article, we look at some industry-specific strategies you can use to help your construction business cope with the late payment of invoices.
Disputes in the construction industry are common; therefore, surround yourself with trustworthy people. Do your research on suppliers, tradespeople and contractors, so your projects can get to a good start.
Start with developing a detailed project plan with clear milestones and timelines. Anticipate potential delays or disruptions and plan accordingly.
Careful planning at the data-driven estimations stage enables you to quote correctly and structure payment timings at crucial junctions.
Utilize construction management software for project tracking, budgeting, and invoicing. Throughout the project, automation can streamline processes and improve accuracy.
Forecasting and Cost Estimation
Streamlining your forecasting process should start with a basic outline of the costs of the job. At a minimum, you must consider a basic project management estimate or a cash flow spreadsheet.
There are also professional solutions to these, but that is not necessary. You will have much more accurate quotes as long as you have a system that considers materials, costs, and labour for each job.
Ideally, you will develop a comprehensive cash flow forecast to predict high and low liquidity periods. Plus, regularly update the estimates based on actual project progress.
The other side to this story is ensuring you accurately research your costs.
Accurate quoting helps prevent nasty surprises down the track, as well as helping ensure maximum profitability. Additionally, precise project cost estimation will avoid underpricing or unexpected expenses.
Underquoting hoping to get a specific job is a surefire way to create serious cash flow issues for your business. Cheap jobs can signal low quality, which does not guarantee you will get the bid. Accurate estimations of your costs and markup should be your main benchmarks for pricing to ensure positive cash flow.
Your quotes must include all direct and indirect costs, such as materials, labour, equipment, permits, and overhead.
Get the Best Prices, Use Control Costs
Build strong relationships with suppliers to negotiate favourable terms. Plus, you can go a step further and explore discounts for early payments or bulk purchases.
Securing long-term supplies of essential materials at low cost is a great way to help your cash flow. If you have carefully considered the project and accurately predicted how much material you need, this can be purchased in bulk for significant savings ahead of time.
Careful monitoring of the current market prices for materials starts with solid relationships with suppliers. Taking the time to shop around and using the natural competition among suppliers is critical to saving costs.
Review your fixed costs constantly and look for ways to remove or reduce them. Always negotiate with your suppliers for better terms. Also, carefully review and negotiate contracts to ensure fair payment terms. Be transparent about change order procedures and associated costs.
Billing and Invoicing
Negotiate favourable payment terms with suppliers and subcontractors. Aim for staggered payments tied to project milestones.
Set up payment schedules that align with project milestones. Invoice promptly and accurately based on completed project milestones. Clearly outline payment terms in contracts and invoices.
Remove as many barriers or obstacles to turning payments into cash flow. Have all relevant evidence and invoices ready so that when payment is due, it is processed promptly. If you’ve done the work and the delay is on the other side, assert your rights and receive payment for services rendered.
The reality of construction work is that it is in stages. So, too, the progress payments may not match up to what is due to your subcontractors and suppliers. Its inevitable negative cash flow will impact the business for weeks on end.
Furthermore, consider requesting upfront deposits to cover initial costs.
Be Aware of Cash Flow Drains
Payroll is going to be a significant drain for most companies. There is generally little leeway in delaying employee payments, although specific payment terms offered to subcontractors, like paid-when-paid clauses, can help delay these payments.
It would help if you also considered timing when paying your suppliers. Paying bills too early is just going to tighten up your options.
Consider your payment terms and pay nearer to the due date as much as possible.
Cash on hand is a valuable asset and should not be used as a default source of funds for general payments.
One strategy to help improve cash flow is to keep cash for emergencies and use credit to purchase materials needed for construction. It is worth taking the hit via interest payments for the flexibility and ability to have emergency funds via cash reserves.
Cash flow management in construction is all about proper planning.
Accurate quoting based on cost calculations, a realistic understanding of how the construction industry operates, a focus on looking for the best prices, negotiating with suppliers constantly, considering project-specific timings and avoiding cash flow drains is the key to keeping your construction business’ cash flow healthy.
Are you interested in using software to power your construction business? Check out the following article.