Cashing in Featured

8:00pm EDT May 23, 2005
Cash is the lifeblood that runs through the veins of every construction company. Unfortunately, many contractors are more comfortable bidding jobs and dealing with problems and technical matters in the field than with collecting the money they are owed.

However, the ability to find and maintain a positive cash flow remains at the heart of the most successful contractors. More contractors go out of business because of a lack of cash flow than a lack of backlog or profit. Contractors do not have to be in business to make money but they do have to make money in to stay in business.

Cash flow management starts when contractors decide to bid a job. Many are more interested in submitting the lowest successful bid than in the importance of cash. However, their joy can be short-lived if they have left too much on the table.

When deciding whether to bid a job, contractors should address several questions. How busy will the company be when given notice to proceed? Has it succeeded with this type of contract in the past? Is the job location feasible? What is the impact of seasonal conditions? Are there unusual contract clauses that could negatively affect cash flow?

In addition, the contractor should review the customer's past payment practices for instances of overinspection, improper or excessive back charges and significant reductions in payment requests. If the payment history is questionable, it is not prudent to bid the job.

If the decision is made to bid, remember that because profit ultimately turns into cash flow, the margin or reward must justify the risk. Therefore, negotiate best payment terms before -- not after -- the contract is awarded.

Contractors face unique problems when it comes to collecting their money, including retainage, pay when paid clauses, pay if paid clauses, right to stop work, back charges, approval of change orders, front-end loading, partial payments, receiving timely monthly progress and final payments, mobilization, stored materials, claims, lien rights and disputes. It is imperative that contractors adopt a corporate culture and attitude toward their right, not privilege, to collect owed money.

Knowing each contract's billing terms, including the timing for submission of billing, the approval process and the contact person, is a must. Always deliver the first invoice in person, as well as subsequent large invoices, and pick up checks to eliminate delays and excuses.

To facilitate a friendly working relationship, take your customer's controller/CFO to lunch. After the initial meeting, do not wait until payment is past due to call again. Contact the controller/CFO a week to 10 days before payment is expected to confirm that everything is on schedule. If you wait until payment is past due, you may have missed your customer's billing cycle for the next month, and your second invoice might be incorrect and, therefore, also delayed.

Profit fade and cash flow drain also result from the improper handling of change orders. It is imperative that everyone on the job be aware of work outside the original contract's scope and communicate this information daily so that proper change orders can be issued.

Written documentation through such mechanisms as field change order forms signed by the customer's authorized representative provide an excellent tool for substantiating your company's right to extra compensation.

Other cash management techniques

Contractors must keep a tight grip on cash flow at all times to survive construction's volatile and high-risk environment. Also consider mailing checks as late as possible, using specialized accounts to maximize cash flow and investing excess or idle funds.

In summary, a construction company can be as complex and mysterious as the human body. To maintain the financial health of the corpus, contractors must be committed to self-examination, consultation and diagnosis with their outside financial "doctors." This includes getting your company's prescriptions filled and seeing that it takes its medicine.

By the way, isn't it time for your company's annual physical?

Anthony R. Stagliano is a CPA and Certified Construction Financial Planner. Stagliano is national director of Construction Industry Services for Mayer Hoffman McCann PC, an independent CPA firm, and CBIZ Accounting Tax & Advisory in Plymouth Meeting, Pa. CBIZ, a publicly traded company and the 10th largest accounting firm nationally (Accounting Today), provides a wide range of assurance, tax and consulting services to small and mid-sized companies. Reach Stagliano at or (610) 862-2420.