Cash Flow Management in Construction Project.
Making profit in business may be the key objective of the Board of Directors and Shareholders. However, poor cash flow is often the main reason for failure and especially in longer term projects such as in construction where buildings may take several years to complete.
So how to improve cash flow in a construction business?
Make sure that the original quotation is realistic.
Make sure your team is experienced and are not overly optimistic. Cash flow in construction is a very hot topic especially in the covid climate. Have a target profit margin and stick to it. Do not be tempted to go low to get another contract to get cash to use to finish other work.
Get an advance up front.
Make sure that cash flow in construction projects is solid from the start especially if major costs are front loaded. It is normal to get the eventual building owner to pay the contractor a percentage of the contract value in advance. This can be treated as an interest free loan and amortized against future billing payments. Again, this needs to be very clearly stated in the contract.
Make sure that major costs are index linked.
If you are quoting prices per unit in a contract which may last years you must make sure that raw material price changes are linked to a recognized price index. In Dubai some years ago the price of steel worldwide rocketed and caused huge problems.
Make sure that your ERP System can handle multi line project budgeting.
It is very easy to think that if you have only spent half of your budget and you still have millions to collect there may be no problem. However, unless you can load your original quotation on to your system and then spend against it line by line you will not really know where you are. You must always know what your cost to completion is and how much profit you can take.
Make sure that any contract amendments are properly recorded.
I worked on a project in Dubai building villas where the original designs were almost ignored. Builders often make agreements to adjust specifications without contract amendments. Big mess. Every change must be signed off and priced.
Establish strict monthly payment terms.
Your team should measure work correctly and get the billings out asap. Then if your owner constantly queries your bills and delays payments make sure you have a strict policy of when work stops. Name a professional firm in the original contract who will quickly arbitrate disagreements. Delays of a month can kill the cash flow on a tight project especially at the heavy raw material stage.
