Specialty contractors 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 specialty contractors have with cash flow is also essential to understanding their relationships with general contractors––the ones they rely on the most for work.
In a study done by Patrick McCord, MS, and David E. Gunderson, Ph.D., of Washington State University, finances figured prominently in specialty contractor decisions to end relationships with general contractors. Timeliness of payments, financial capacity of the general contractor, and retainage practices were in the top six of reasons cited for breaking it off with a contractor––mainly because these factors affect how cash flows to specialty contractors, and much of it is beyond their control.
But, there are many things about cash flow that are within your control as a specialty contractor––starting with knowledge.
Cash Flow Perspective
There are aspects of managing your cash flow that are the same for any other business. First, you have to understand cash flow and use good accounting indicators to track it. Every specialty contractor 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 labor. They feel it when they can’t bid on a job because they don’t have the cash to front the costs of estimating and bidding. They feel it when they need to purchase materials to start a project on schedule. It’s easy to understand the pain points of specialty contractor cash flow.
Still, 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.
Using Cash Best Practices
Subcontracting is a dynamic business, and your cash position sometimes changes by the hour. That’s why it’s important to use generally accepted indicators to keep track of your cash flow. According to Michael McLin, an Managing Director at Maxim Consulting Group, important cash flow considerations should include:
- Do the Basic Blocking & Tackling
- Conduct a forward-looking 12-week cash flow projection.
- Accelerate your A/R to less than 45 days for specialty contractors.
- Decelerate your accounts payable (A/P) – Best Class contractors are getting 2% discounts on 60-day terms.
- Expand your line of credit to 10% of sales for subcontractors.
- Reduce expenses to align the overhead to the volume.
- Conduct Lender Negotiations
- Expand your line of credit – perhaps approach it as temporary and convert it to permanent.
- Explore payment deferral options.
- Explore interest-only payment options.
- Explore fee suspension programs.
- Evaluate Options with Capitalized Assets
- Options to sell or lease back a building.
- Options to sell or lease back equipment.
- Evaluate micro-captives such as an 831(b) captive.
- Establish clear criteria for rent vs. lease vs. buy decisions.
Staying Cash Positive
Once you’ve understood accounting and are using the cash flow best practices, 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, there are six widely recommended ways to keep your cash flow positive.
1. Build Strong Relationships
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 authentic.
2. Have a Documented System for Collections
According to Scott Wolfe, CEO of LevelSet, “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.
3. Proactively Manage Schedule of Values
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. The easier it is for them, the better your chances of quick payment.
4. Recognize and Process Changes Quickly
If you’ve been involved in the early stages of the project, you’ll have had a chance to inform the design and hopefully reduce the number 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.
5. Get Yourself into a Secure Position
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.
6. Be Prompt with the Punch Lists
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. 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.
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