inadequate cash flow kills more construction businesses than poor

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Inadequate cash flow kills more construction businesses than poor profitability.

Learn techniques from startup through project close-out that can be used to improve cash flow – and profitability. These ideas are all based on real-world experience and projects including how to use ForeFront to streamline and manage the processes.

This paper and session is geared towards anyone directly involved in the management of projects, PM’s or financial managers and will include worksheets and ideas that can be put to use immediately in your business.

Cash Flow and the Project Team Typically the measure of a project and the project management team is gross profit. Cash flow concerns are left to the Controller, CFO or owner.

Why is this? For one, there is the thought process that outside progress billings, the project management team has little control over cash flow. The second is the theory that cash flow and profitability are two separate things.

First we are going to make strong arguments about why the project management team has a phenomenal degree of control over cash flow and why cash flow is probably a more important measurement than gross profit. After that we are going to provide ten thought provoking ideas to help your project team improve cash flow. Not every idea will be applicable to every company but you can expect to leave with at least a couple ideas that can be put into practice immediately.

How the Project Team can Impact Cash Flow ($25,000 Per Day)

Improving cash flow by one day in a contractor with $10 million per year in revenues will generate over $25,000 of cash.

Kaizen is the Japanese word that basically means “continuous improvement.” This is the philosophy they take in their manufacturing. When building a car they focused relentlessly on saving a penny here, three seconds there, another penny down the line, etc.

EVERY worker on the assembly line has the ability to stop the entire line if they see an opportunity to save money, save time or improve quality.

Stopping the entire assembly line to save a penny or a few seconds on a car – are they crazy? The answer isn’t that obvious. After years of doing this and thousands of “shut-downs” they gained a significant edge in both cost and quality.

What Cash Flow Means to a Business

Without cash flow you will not be in business

Good cash flow allows you to take advantage of early payment discounts

Cash flow will determine how fast you can grow your business

Banks often watch cash flow as a covenant for credit lines


What if you took this same approach to cash flow in your business?

What if you had everyone on the project team thinking about cash flow every day and continually working on all those little details every day?

How much would your business change if you could improve cash flow by ten days?

A good portion of the Project Manager’s job is to facilitate and expedite processes inside and outside your company – everything from getting deliveries to the jobsite to getting purchase orders out. Armed with the right information they can do the same with cash flow processes.

Cash Flow vs. Gross Profits

Why is it that we measure project success based on gross profit?

Measuring gross profit is simple to do with a job costing system – cash flow isn’t

You can directly tie gross profit to the estimate and budget

Gross profit is at the top of the P&L statement and easy to understand

There isn’t a direct correlation between gross profit and cash flow – or is there?

In theory there is no direct connection – it is possible to have a job with horrible cash flow turn out to be very profitable.

In reality there is usually a strong correlation between good cash flow and project profitability. Do an analysis of all your projects for the last few years. Analyze both their cash flow metrics and their gross profitability. Throw in some additional factors such as customer satisfaction and repeat business.

Chances are very good that you will find strong statistical evidence linking good cash flow to good profitability and other measures of a successful project. This is why banks, bonding companies and experienced operations people focus on under billings as potential flags to profitability problems.

What would happen if you shifted the focus of your project team to think first about cash flow and then about all the other factors that are required to achieve good cash flow including quality, customer service and profitability?

Ten Ideas for the Project Team The following are some quick ideas that Project Managers and their teams can use to improve cash flow. Not every idea will be applicable to your company – just one or two key ideas you can implement will add thousands of dollars of free cash flow.

1. Relationships are EVERYTHING!

Don’t leave any relationship that has to do with cash flow to chance.

Identify every person and who in your organization will manage the relationship.

Don’t forget about the inspectors, accounts payable contacts, project administrators, inside sales people and compliance officers – for your customer – the project owner and your subcontractors.

Make initial contact with every one of these people to gain an understanding of what they expect, what their exact timelines are, compare formats to make sure things are compatible.

Help your subcontractors and vendors with their compliance documents and other documents that impact the cash flow process.

How could this idea be used to improve cash flow in your company?


2. Flowchart Cash Flow Processes

Creating a flowchart for each process on a project that impacts cash flow will help you identify relationships and also identify potential areas where the process can be improved. An example of this flowchart with improvements shown in dashed lines is below.

Simple Improvements – Big Results (Kaizen at work) 1. Share the schedule of values with the Foreman a week before it is due. Go over areas where the

Foreman believes they can complete more of the billing item to provide the best cash flow.

2. Usually there is an inspector or on-site owner’s representative who is responsible for approving these percentages. The Foreman is most likely the person who interacts with this person the most. Have the Foreman “informally” go over the billing and percentages complete with this person a couple days ahead of time to avoid processing problems.

3. If there are compliance documents that are due such as certified payroll or lien releases make sure the PM knows about them, knows who is responsible throughout the process and checks-in to make sure these are taken care of.

These three additional steps can add thousands of dollars to each billing cycle and improve receipt of payment by days, even weeks.

What other processes can you map out?

What other minor improvements can be made?



3. Billing Format / Schedule of Values

Outside of a having a profitable estimate to begin with there are the most opportunities for improving cash flow in this process.

Include items on the billing format for Mobilization and Submittals / Shop Drawings. These are the first activities that happen and if managed properly they can give you an immediate boost in cash flow.

Breakout major material procurement as separate line items so that you can get paid as soon as the material hits the jobsite.

Make a worksheet similar to the one below and require that PM’s create a cross-reference between the billing format and the budget – load additional money into activities that will happen earlier on the project.

DESCRIPTION VALUE BUDGET01 Mobilization 10,000 3,000 7,000 70%

02 Submittals & Shop Drawings 7,500 2,200 5,300 71%

03 Materials - Underground 12,500 9,000 3,500 28%

04 Materials - Power Distribution 46,000 35,000 11,000 24%

05 Materials - Conduit & Wire 28,000 21,000 7,000 25%

06 Materials - Light Fixtures 56,000 42,500 13,500 24%

07 Sitework & Utilities 25,000 18,000 7,000 28%

08 Underslab 15,000 9,500 5,500 37%

09 Branch Rough-In (Conduit & Wire) 35,000 22,000 13,000 37%

10 Feeders & Switchgear 50,000 45,000 5,000 10%

11 Lighting Installation 45,000 51,000 (6,000) -13%

12 Fire-Alarm System 20,000 24,000 (4,000) -20%

13 Security System 15,000 19,000 (4,000) -27%

14 Devices & Trim 5,000 7,100 (2,100) -42%

TOTALS 370,000 308,300 61,700 17%

CASH / G.P.

Check with your customer. Find out their billing process and format. Make your billing format easy for them to incorporate. If your billing format is the easiest for the customer to work with it will get processes first.

Follow-up with your customer immediately after sending the billing to verify receipt and that everything is in order. Follow-up 20 days afterward to get a “Check-Cut” date.

4. Subcontractor / Vendor Pay Schedules

You can improve your cash flow and the performance of your large vendors and subcontractors by proactively designing their pay schedules.

Design their pay schedules to integrate seamlessly into your format.

Provide financial incentives (carrots) up front for critical activities such as mobilization, submittals and shop drawings.

Retain money to provide a financial hammer at the end of the project to facilitate rapid collection of as-built drawings, test reports, O&M manuals and other close-out documents.



5. Managing the Schedule – Leveling Resources

A project schedule that forces large fluctuations in manpower or equipment will significantly impact cash flow. Working with your customer to level resources on the project schedule should be top priority.

You will not be able to complete activities on-time

Failing to complete activities on-time may result in assessment of liquidated damages

Going to extraordinary lengths to maintain a schedule without leveled resources will cost you additional money, force you to work overtime, hire additional manpower or rent outside equipment which impacts cash flow.

Peaks and valleys in resources lead to inefficiencies and hurt profitability.

Schedules that cannot be maintained will cause general schedule overruns – even if you are not assessed liquidated damages you will spend additional money on extended overhead costs.

Poor Resource Leveling

Good Resource Leveling

6. Submittals and the Close-Out Process

For projects requiring submittals the submittal log and entire submittal process offer significant opportunities for improving customer service and cash flow.

Be very detailed in the creation of the log – break submittals down into every detail required in the specifications or contract.

Coordinate the submittal log dates with the schedule and schedule of values to maximize cash flow.

Include responsibilities for all submittal line-items. Use the log filtered by these responsibilities in conjunction with the financial incentives and hammers built into their pay schedules to move the process along rapidly.

Include every close-out detail on the initial submittal log – start on these as early as possible.



7. Improve Change Order Processing Time

A common misconception in the industry is that change orders are good for profitability and for cash flow. The truth is that change orders often don’t have that much gross profit margin built into them considering the amount of disruption they cause to the construction process.

This misconception often leads to sloppy management of the change order process, which results not only in poor profitability but also in slow approval and payment of change orders – impacting cash flow. Below are some ideas to help manage change orders for both improved profitability and cash flow.

Use project pre-planning to identify changes before you start

Get to know everyone involved in approving your change requests

Find out exactly what the specified change processing time is

If a time isn’t specified in the contract try to insert your own clause

Setup a change request as soon as you THINK there may be an issue

Make pricing change orders a top priority in the company

Manage all your documents electronically

Attach all supporting documents to your change request in one PDF

Make sure your backup format meets the contract requirements

Build your change request format to match the customer’s

Get change requests on billing format as soon as they are submitted


8. Compliance & Administrative Documents

These documents are usually managed as part of the contracts department, A/R or payroll. The project manager should be aware of these processes and make sure that these processes occur in a timely manner.

Not handling compliance and administrative issues in a timely manner impacts cash flow.

Poor handling leads to the perception of poor customer service.

The project manager should be aware of all these documents.

The processes for approval and how they impact cash flow should be mapped out at the pre-job meeting.

In addition to function specific managers the project manager should also follow-up on these processes for their projects to make sure they are happening on-time.


Don’t Let These Stop Your Cash Flow

Insurance certificates

Certified payroll

Fringe benefit statements

Lien releases

Daily reports

Safety meetings

Incident reports

Billing Backup


9. Punch Early – Punch Often

No matter how good of a job you have done throughout the rest of the project the perception of customer service will rest largely on how well the punch list and close-out processes are handled. In addition long punch lists eat up job profits and delay final payments.

Don’t wait until the end

Make your own punch list

Make a list every few hundred man hours

Note areas where others are impacting your work

Resolve punch list items fast


10. The Close-Out Process

On most projects even at the very end of the project you will still have a significant portion of your cash still being held by the customer either in the form of final payment, retention or both.

How fast this money is released has a lot to do with how efficiently the close-out process is managed. Here are a few ideas for improving the close-out process:

Start the close-out process as early as possible – many of the pieces of the close-out process can be done almost immediately after the submittals are approved.

Make sure your billing schedule has been loaded to shift most of your money away from these final close-out items.

Use all communication tools at your disposal to notify subcontractors, vendors and members of your own project team about what needs to be done to close-out the project. Start the communication process early.

Use the financial hammers you have put in place for your large vendors and subcontractors to make sure these close-out items are not put on the back burner.


Close-Out Details

O&M manuals

Spare parts

As-built drawings

Test reports

System training


Ten Ways Can Help 1. Use the directory feature of the Project Management module to detail out all critical

relationships on the project.

2. Use the Speed Memo and Transmittal features of the Project Management module to communicate early and often with all people on the project team.

3. Use the Custom Issues feature in the Project Management module combined with document imaging and cross-project reporting to make sure specific processes are being managed throughout the company on all projects.

4. Create a solid budget, billing format and cash flow plan for the project using the Project Budget and A/R Billing features.

5. Use the budgeting system cross-referenced with the project schedule to make your case for better resource leveling.

6. Use the Submittal tracking feature of the Project Management module along with document imaging to create a very detailed log of all critical documents that have to be submitted throughout the project.

7. Use the Change Order Request in the A/R module to enter every potential change or impact on the project and to track them through the entire process down to final issuance of the Change Order.

8. Tie all backup documents to the Change Order Requests and send backup out with the change request for rapid processing.

9. Use the Document Tracking feature to flag everyone of missing compliance documents from subcontractors and major vendors.

“People don’t do what you expect – they do what you inspect.” – Lou Gerstner, ex-CEO of IBM

10. Use cross-project and multi-company reporting capabilities of ForeFront® to make sure that all these items are being kept on track throughout the company.

Early indications that any of these processes are slipping behind or not getting done can be used as flags to potential cash flow and profitability problems long before they show up on the job cost report.

11. BONUS – Train Everyone and Make Cash Flow a Game Don’t let these ideas sit in your conference binder gathering dust. Cash flow is serious business and the best way to improve it is by getting everyone involved including project management, the foremen, contracts, accounts payable, accounts receivable, purchasing and payroll.

Share this document including your notes with everyone.

Use it as a starting point and brainstorm more details that can improve cash flow.

Create company-specific training with the results from these brainstorming sessions.

Put systems in place to manage the processes.

Put systems in place to verify the processes are getting done consistently company-wide.

Change or add to the compensation system to take cash flow into account.

There is no company out there that couldn’t benefit from better cash flow. If you don’t have a cash flow problem today then implementing some of these ideas will only improve a good situation and possibly mitigate a future cash flow problem.

Cash is like water – you need it to survive and you cannot start digging a well after you get thirsty.

The ForeFront® Construction Management System has a variety of modules designed to help manage projects and operations more efficiently that tie directly into the accounting system. Dexter+Chaney provides training and consulting services to help integrate these modules into your company’s processes, providing a total management solution. Call your account representative for more details.