Cash flow in construction is… well, probably the most important aspect of a construction company. It is also one of the most challenging things to handle in the day-to-day operations of a business. In this article, we will explore the challenges construction companies face, as well as provide 4 ways to increase cash flow quickly in your construction business. Let’s jump in!
The Challenge of Cash Flow in Construction
In the unique industry of construction, cash flow is one of the biggest hurdles companies face when building a business. Here are 3 of the main challenges construction companies face regarding cash flow:
1. Payment is often based on completion milestones.
Construction projects can span weeks, months, and in some cases years. Unlike a typical direct-to-consumer business (think Amazon, or the grocery store), construction is typically billed based on completion milestones. It is common for construction companies to collect a majority of the payment after all the work has been completed. That would be like paying the grocery store only after you have eaten the food! This is a unique challenge in construction that leads to limited cash flow.
2. Capital is required to start a project.
It doesn’t take a construction expert to know, you can’t build something without materials. It also doesn’t take an expert to know that materials cost money, and depending on the size of the job, a lot of money. Payments made by customers are the lifeblood of any construction company, and having capital available to begin a project is a must!
3. Unexpected issues such as change orders, project delays, and client disputes.
This one may be the biggest challenge of them all! Construction is unpredictable. Halfway through a project, customers may change the scope of work, adding labor and material costs that weren’t budgeted or expected. Unforeseen delays may occur due to weather, material back orders, or sick/injured laborers. And worst of all, customer disputes on payments or agreed upon scope.
Despite these challenges, hope is not lost. Let’s explore four strategies to quickly improve cashflow!
Four Strategies to Improve Cash Flow Quickly
Recognizing the importance of effective cash flow management is only the first step. Implementing strategies to enhance it is where the real work begins. Here are four actionable ways a construction company can improve its cash flow quickly:
1. Get Approvals and Payments on Change Orders
Change orders, both big and small, happen frequently in construction! An industry report from 2023 showed that 32% of profits are lost in the construction industry due to undocumented and unpaid change orders. One easy way to reduce profit loss and improve cash flow is by documenting change orders with digital signatures and billing for a majority of the change order upfront.
For example, if a customer changes the type of flooring on a bathroom remodel, collect the balance before materials are ordered and labor is performed. This ensures that work is paid for, and you aren’t stuck eating the cost difference on the upgraded floors.
Using a software system like Projul provides a quick and easy way to create, send, and have change orders approved. You can learn more about how to increase your bottom line with change orders here!
2. Collect Deposit and Progress Payments
A deposit payment should take place on every project! This covers a company in the event of customers canceling projects after materials have been ordered or laborers have been paid for portions of the work.
Something that not every company does is progress payments throughout the job. If you are remodeling a bathroom and electrical work has been completed, a progress invoice can ensure any subs are paid on time, and additional cashflow is available for unexpected project expenses.
Many invoicing software allows for deposit and final payments, but Projul allows for an unlimited number of invoices to be sent. Deposit, progress, change order, and final invoices can be easily sent and paid through Projul. Check out more on our invoicing tool here.
3. Build Higher Profit Margins
A straightforward way to improve cash flow is to increase profit margins. This can be achieved by negotiating better terms with suppliers, improving operational efficiencies, or revising pricing strategies. Higher profit margins provide a buffer that helps manage cash flow fluctuations, especially during slower periods or when unexpected expenses arise.
4. Offer a Variety of Payment Options
This solution can help customers pay for invoices in a more timely manner. Adding the option for credit card payments is one way to incentivize early and fast payments from customers. Customers may have bonus miles, rewards points, or cashback, that can motivate them to pay invoices quickly.
ACH payment options give your customers another option to pay balances quickly. Traditional checks or cash payments require another site visit, but a digital ACH payment can save a trip and allow another option for your clients.
Summary
In conclusion, improving cash flow and making a focused effort to do so will allow your business to experience healthy, sustainable growth. While this can be a daunting task, using these 4 simple steps is a great place to start. You can also look into construction management software like Projul to help increase cash flow and grow your business. Schedule a call with one of our construction software pros to see how the system can help your company!