Previously, we discussed how construction project estimates and the way in which cash flows in and out of a job affect a contractor's ability to manage cash flow. Today we'll discuss two more minefields that contribute to construction cash flow's volatility.
It's typical for construction companies to be working multiple jobs at multiple sites managed by separate project managers. This is a good thing, except sometimes when cash starts crossing lines. A story I've heard too often goes a little like this: Job A seems to be under-budget and ahead of schedule. Job B is in trouble and needs funding, so back at the office cash is moved from A to B. Well, it turns out that although Job A was at the halfway point on the timeline and was under 50% on projected cost, the actual work completed put the job at an effective 25% complete. In reality, not only was it behind schedule, it was over budget, and not a good candidate to fund shortfalls on another at-risk project.
Remodeling a bathroom is a good do-it-yourself (DIY) project (for the brave). Constructing a building or infrastructure is rarely if ever a one-company affair. Contractors are at the financial mercy of subcontractors and vice-versa, and both depend on constant supply and predictable pricing from vendors. In short, construction is a team sport and if one player drops the "cash ball," everyone loses. Default on a big project ripples through the general ledgers of every company, supplier, and owner involved. Poor performance by one tradesman can affect the entire timeline and therefore cash pipeline of a job.
It may seem that negotiating a path to profit through this cash flow minefield is nearly impossible. The good news is that there are proven paths through the difficulties. Stay tuned as we continue the cash flow conversation.
How you manage cash flow in your office?