Securing positive cash flow is one of the most important elements for the success of any construction project. In this post, I will highlight the three key steps for identifying and correcting cash flow issues before it is too late.
Step 1. Identify the problem.
a. Conduct Cash-flow analysis by project.
To avoid project cannibalism (where one project eats into the cash of another) each project should be analyzed on its own. The importance of cash in construction is so crucial, that literally, a single job with negative cash-flow can destroy a company.
b. Account for Committed Costs.
Many project cost reports do not factor in the committed costs for the project. Purchase orders and sub contracts need to be accounted for along with the current costs. These commitments, if not looked at and considered, will damage cash-flow once they arise. When you generate a committed cost report, you will have a clear picture of how much cash you’re going to need for the project in the future.
c. Keep an eye on Profit Fade.
The anticipated profit of a project at the bidding stage fluctuates dramatically against actual progress. When measuring profit fade, an increase in cost should be matched with an increase in profits. If you see a significant increase in cost, it should translate into increases in profits via change orders, otherwise, the project is starting to lose.
Keep an eye on “Profit Fade.” – If you see a significant increase in cost and no increase in profits via change orders or additional invoicing, your project is starting to lose.
As you look into the information, you will start forming a picture of how your projects are progressing. After all, you could have a profitable project in negative cash-flow, which could jeopardize the financial health of the whole company.
Step 2: Take Action
You’ve now determined where the problem is, whether its profit fade due to poor documentation or processing of claims / change orders, or perhaps schedule slippage is causing the project to lose. It’s now time be decisive and make a few hard calls. Corrective action requires sacrifices to be made and that doesn’t necessarily make everyone happy, but special situations require special measures.