April 2003
By JAMES S. ANCHIN, CPA
Along with a job well done, proper cash management should be a contractor's top priority. However, achieving that goal isn't only the result of good financial practices; contractors must realize that their day-to-day operations have as much an impact on solid cash flow and increased profits as do the best financial procedures.
Ideally, finance and operational staff should be involved in all stages of the construction process to assure that the decisions made impact cash flow favorably. In fact, it's a good idea to build-in this goal by tying employees incentives and bonuses to how well they've managed to maintain a good cash flow throughout a project.
Decisions made long before ground is broken can make or break a contractor's cash flow situation. It is not unusual for even successful contractors doing multi-million dollar jobs to work with owners whose financial security is in doubt. Creditworthiness and financial strength should be checked for any entity in which a contract has been signed, be it with an owner, a subcontractor or a supplier. Pegging employee incentives to collection of receivablesÑas opposed to merely completing the jobÑis another way to reinforce financial integrity.
The Contract
While project managers, estimators and other key construction staff have a good sense of the operational issues; they may not be sensitive to terms that can have cash flow implications. Both construction and finance staff should examine prospective contracts before bids go out and even more closely after bids are won. The finance people can provide an important, added perspective in reviewing a contract. With their participation, how and when a contractor gets paid will be ironed out to the company's benefit. It is also important to realize that a contract may stipulate that records or documentation are to be kept in a way that may be inconsistent with the company's accounting practices. While this may not seem to be a problem in a project manager's eye, finance staff can head off, and hopefully rectify, this potentially troublesome stipulation. Most contracts can and should be negotiated, particularly in terms of payment, reporting requirements and penalty provisions, both for performance and non-payment.
From here, bid details should be modified to fit into an overall schedule that outlines the month-by-month work that will be completed and billed. In an effort to reduce payment disputes, that document should be forwarded to the owner so that he or she knows up front what the expected monthly payouts are to be for the duration of the project. A key cash flow element to consider is that most construction projects have heavy up-front costs, which should be reflected in the billing schedule. Meetings between the owner, subcontractors and suppliers provide a forum to discuss these issues and to ensure that each party knows what's required in terms of project progress, payment and documentation.
With the actual start of construction comes an opportunity to influence cash flow. Observing the job completion and billing schedule is critical, as is submitting properly completed paperwork on time. Job cost reports should be circulated regularly among project managers, superintendents, job site personnel and the finance department, with both sides of the business keyed to spotting potential problems while there is still time to do something about them.
Though a payment schedule may have been issued and agreed upon, actual collections may, at times, be difficult. Heading off all reasons for failure to pay speaks directly to maintaining good cash flow. Checks are often held up in the owner's or general contractor's organization. Contractors who know or have spoken with the individuals in command may have an easier time obtaining payments if delays arise. Additionally, by including pre-addressed stamped envelopes and any payment instructions along with your invoices, you can make the process easier for them, while ensuring yourself prompt payment.
A slip in accounts receivable is a negative for cash flow. Make sure your requests for payment and the owner's payment compliance are tracked on a regular basis. If the owner or general contractor isn't meeting the terms of the agreement, act quickly and cooperatively to get the process back on track. A close relationship between the construction, finance and accounting team will speed identification and resolution of payment issues. Contractors might also consider forming a dispute resolution team that will handle a potentially bad situation and refer it to the proper authoritative individuals to rectify.
Keeping the cash flow positive is a result of scores of decisions throughout the construction process. The best decisions will be those that reflect the expertise and experience of both operational and financial people in your organization.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.