Cash Management Tips for Construction Contractors

Blog
August 16, 2017

Cash management is one of the most important financial measurements construction contractors need to monitor in order to stay competitive within their industry. From the bidding phase through project closing, established policies and procedures can improve cash flow so your construction company stays ahead of your competition. I discuss tips for establishing these types of procedures for each stage of the project in my latest NUCA’s Business Journal, article, “Effective Cash Management for Contractors, co-authored with Tim Cummins. For this blog, I have created a short list of the main points for you to consider during each stage.

Bidding on the job

Having an effective cash management strategy in place can help you distinguish yourself from your competition when bidding on a project. Follow these tips to help you win new opportunities:

  • Budgeting: Successful cash budgets consider cash activity of the job, estimated labor requirements, and anticipated overhead cost requirements. Make sure your cash budgets are flexible, dynamic, and responsive to any adjustments that will need to be made while on the job.
  • Forecasting: An effective cash flow forecast predicts future needs by thoroughly examining past and future project billings, costs, and overhead expenditures. No two forecasts should be the same. They should be prepared on a project-by-project basis.
  • Negotiating: Develop a solid foundation by making sure certain parameters affecting subsequent cash collections and disbursements are adequately defined during the bid process.

During the job

Congrats, you’ve won the project! Contractors can maximize cash balances and minimize the time cash is not invested by continuously paying attention to these fundamental concepts:

  • Accelerating Cash Receipts: Make sure all steps are completed in a timely manner following proper authorization and documentation. Contractors can ensure that their jobs are not falling behind by properly monitoring the collection of receivables. Sound processes for operation purposes should be in place to ultimately help you convert collections into deposits.
  • Decelerating Cash Disbursements: To have the largest return on your cash, do not make payments until the last possible day. Ditch the cash and make your purchases using the company credit card to have an additional 30-day buffer. However, this does not mean that you should buy excess inventory and supplies that you will not use. You can also save money on payroll taxes and other personnel costs by hiring independent contractors to help finish the job.

After the job

You finished the job, now what? Contractors should focus on formally closing out the job, which could often be the most difficult phase of the project. Below is a list of information you should look out for during this phase:

  • Beware of Overruns: Contractors who do not incorporate adequate controls during this process will not turn their profits into cash. By overlooking this during the closeout phase, your company will be more prone to cost overruns.
  • Use a Close-Out Checklist: A close-out checklist will help guide you in making sure all the stages of the job have been performed as agreed upon in the contract.

 

For construction contractors, cash is fundamental. By having an effective cash management strategy in place, your company can distinguish itself from your competitors who are struggling to stay afloat. A multifaceted approach should be developed and communicated to everyone within the company before the projects start rolling in.

For more details and tips for each stage of the project, please refer to NUCA Business Journal’s article, “Effective Cash Management for Contractors” published by Tim Cummins and Kamal Eko. Aronson is a proud member of NUCA National and NUCA of DC.

If your company would like us to evaluate the effectiveness of your cash management process or need assistance with identifying strategies that will help to improve your cash flow, please contact Kamal Eko at keko@aronsonllc.com or 240.364.2666.