Technology in Construction is Now a Reality, with Drones Leading the Charge
Building Up To Smart Skyscrapers
The Big Renewable Projects You Should Know About
NSW's New Construction Plan Calls for Transparency and Collaboration
Can Affordable Housing Even Out Construction Cycle?
How to Gain Leads and Get Ahead of the Competition
How Digital Drawings Are Transforming Construction
The New Green Toolkit — What You Need to Know
By Erica Konieczny
June 5, 2016
Subcontractors have bigger challenges with cash flow than many other construction project participants; they are close to dead last in the payment line, and their work progress is easily affected by others. The relationship subs have with cash flow is also important in understanding their relationships with contractors––the ones they rely on the most for work.
In a study done by Patrick McCord, MS and David E. Gunderson, PhD, of Washington State University, finances figured prominently in subcontractor decisions to end relationships with contractors. Timeliness of payments, financial capacity of the general contractor, and retainage practices, were in the top six reasons cited for breaking it off with a contractor––mainly because these factors affect how cash flows to subs, and much of it is beyond their control. But, there are many things about cash flow that are within your control as a subcontractor––starting with knowledge.
There are aspects of managing your cash flow that are the same for any other business. First, you have to understand cash flow, and you have to use good accounting indicators to track it. Every subcontractor understands that when they are waiting for payment on completed work after having already paid for the materials, equipment, and labor, their cash supply is limited, and they feel it.
They feel it when payments are due on new work and on labor for the new work. They feel it when they can’t bid a job because they don’t have the cash to front the costs of estimating and bidding. So, from a very basic perspective, it’s pretty easy to understand the pain points of subcontractor cash flow.
But, having that level of understanding isn’t going to improve the situation. It takes a deeper understanding of cash flow, starting with basic accounting terms and their meanings.
Assets are things you have a legal claim to that have value.
Liabilities are debts, or obligations you owe to others.
Receivables are amounts owed to you.
Owner equity is the total of all assets left over after deducting business liabilities.
Subcontracting is a dynamic business, and your cash position changes sometimes by the hour. That’s why it’s important to use generally accepted indicators to keep track of your subcontractor cash flow. According to Christine Rahlf, an associate director at Maxim Consulting Group, important ratios subcontractors should strive for, include:
Working capital between 8% and 12% of your annual revenue
Working capital turnover ratio, where net sales are 8-12 times your working capital
Debt to equity ratio less than 2.5
Days sales outstanding no higher than the high 40s
Current ratio of at least 1.5
Quick ratio of at least 1
Tracking “cash demand” and “cash demand days” ratios so you know how much is invested in the work currently in progress
Once you’ve got the understanding of accounting and are using the cash flow indicators, you will have an early warning system in place to alert you to cash flow problems that are arising. But, whether cash flow problems are coming, or not, there are six widely recommended ways to keep your cash flow positive.
Your cash position depends on many other people. Build strong relationships with those who approve work, process changes, account for compliance, and pay you. Become more than a faceless person to them so you are memorable and real.
According to Scott Wolfe, CEO of zlien, “Most companies leave their collections process to the whim of their collections, credit, or accounting staff.” That’s a mistake when there is no defined collections system because ad hoc methods will prevail, and reduce the effectiveness of collecting.
Whatever you spend in time and money to start up a project is a good candidate for the top of your schedule of values. Whether it’s shop drawings, submittals, or mobilization costs, the sooner you recoup the expenses, the better your cash flow. Also, make your billing format match the needs of your payers, according to David Brown of D. Brown Management, a consulting firm specializing in project management and operational processes for contractors. The easier it is for them, the better your chances of quick payment.
If you’ve been involved in the early stages of the project you’ll have had a chance to inform design and hopefully reduce the amount of changes. However, scope creep can come out of nowhere and changes to scope can become big ticket items. According to Michael Lewis, corporate executive and entrepreneur, changes in what you’re supposed to deliver reduce what you take in, while increasing your costs.
Wolfe counsels to send preliminary notices so you have a secured position in the payment pecking order. When you’re on the secured list, you get paid first.
First of all, do quality work and protect it. That will keep your punch lists small. Then, do your own punch lists and do them often, advises Brown. That way, you can stay ahead of the last minute rush at close out.
Other advice includes streamlining your submittal process, staying on top of closeout items, and making lien waivers easy without giving away lien rights. While some aspects of maintaining a positive cash flow are out of your control, there are plenty that are within it. Use your knowledge, tools, and tactics to go from just managing your cash flow, to mastering it.
The Anatomy of a Request for Information (RFI)
When life is so busy, it can be easy to get into an unhealthy routine. Here are 11 easy ways to break up your routine and live a healthier, happier life…#1 Make your lunches for the entire week…on ... Read More
Maintaining a streamlined and efficient workflow is one of the primary goals of any construction firm. However, whether due to a lack of skilled la... Read More
Budget. Schedule. Quality. The trifecta of a project. But balancing that trifecta isn't easy to do. Our webinar, led by construction industry exper... Read More
Tim Kelly, S&P Technical Services Manager, looked at numerous document management systems, including EADOC and "probably 10 other systems." What bo... Read More
Workplace safety is a front-of-mind concern for any responsible construction company. Strict adherence and compliance with safety training regulati... Read More
Any construction company will have lots of data sloshing around, and many still rely on archaic methods of logging, filing and using that data, typ... Read More
May 14, 2018
The construction industry is on the rebound after the Great Recession and spending is at an all-time high. In November, investment in new projects ... Read More
May 21, 2018