Who couldn’t use more cash during the holiday season?  No matter the season, however, construction companies rely heavily on cash flow to fund their operations.  Cash flow depends on so many variables, but there are a few that you can control.

Written Contract.  As a preliminary matter, make sure that you get a written contract when starting a new project and make sure that both parties sign the agreement.  Too many times I have represented parties who either "did the deal on a handshake" or "never signed the contract."  Disputes over payment will ultimately arise and the contract will dictate how the parties are to address payment (and ultimately cash flow) issues.  Although courts treat oral agreement differently in each state, a written agreement will be easier to enforce.

Contract Provisions.  A recent article by friend Tracy Thomas at Kraft CPAs correctly suggests that the best place to start for creating a healthy cash flow is the construction contract. First, pay attention to payment terms, including whether payment is based upon work in place or equal installments.  Also, consider eliminating any retainage provisions, if possible, or including a phased-out retainage so that your entire gross profit is not left until the project is completed. When drafting subcontracts, consider using a "pay when paid" or "pay if paid" clause so that payment is tied to when you receive payment from the owner.  

Project Management Tips.  Cash flow issues can be addressed in the contract, but Tracy also recommends better project management as a way to improve cash flow.  These include:

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    Assess the financial strength and creditworthiness of the owner as well as other contractors, suppliers and vendors.

  • Prepare cash flow forecasts and make any necessary adjustments during the course of a job.

  • Monitor work-in-progress reports, cash flow reports and other documents to spot cash flow issues while there’s still time to do something about them.

  • Make sure your project management team submits paperwork and issues invoices on a timely basis.

  • Develop working relationships with customers’ accounts payable personnel, staying in touch to ensure payments are on schedule rather than waiting until a payment is past due to contact them.

  • Establish clear change order procedures for your personnel to identify changes in the scope of work and to promptly prepare and document change orders in accordance with contract terms.

  • Don’t make payments to subcontractors, suppliers or vendors any earlier than required unless you’re entitled to a discount for doing so.

  • Tie bonuses or other incentives to effective cash flow management.

  • Use sweep accounts or zero-balance accounts to maximize investment returns on your funds.

Question:  Are there other project management tips that you have to help create a healthy cash flow?