FMI is happy to welcome back John Chaney, co-founder of Dexter + Cheney, a Seattle-based company that specializes in construction management software, for his thoughts on construction cash flow.
Whether you work in a construction accounting department or are a project manager, cash flow is important to your everyday work. The accounting staff needs enough cash in the bank to pay bills and project managers need enough to complete jobs. So why is cash flow so difficult to manage?
Cash Flow Is Not Steady
Unlike the manufacturing, construction projects are not paid for once completed – they are paid for while the work is in progress. Unfortunately, this also means that cash does not flow to the contractor at a steady rate. In construction, cash tends to come in large chunks, but is spent at a steady pace. Managing cash in this environment takes the right mix of skill, tools and constant diligence.
Construction projects are a lot like spinning plates – everyone must be moving together, and the smallest change or unexpected problem can cause the plates to start falling. In addition to managing your own team, there are subcontractors and vendors involved, which means that the slightest alteration to plans, specifications or even schedule affects everyone and his or her cash flow. Not only do you have to work well with your subcontractors and vendors on the job site, you have to work well with them in the office, too.
Multi-Tasking Projects and Cash Flow
To add to the mix, you may have more than one job in progress at the same time. This means more vendors and subcontractors to work with and keep moving in the same direction, not to mention managing the cash flow for each of these projects. Having more than one project in progress is not a bad thing. However, when jobs start funding each other, contractors can quickly find themselves in trouble.
For example, Job A seems to be under-budget and ahead of schedule. Job B is in trouble and needs funding, so cash is moved from A to B. Well, it turns out that although Job A was at the halfway point on the timeline and was under 50% on projected cost, the actual work completed put the job at an effective 25% complete. In reality, not only was it behind schedule, it was over budget and not a good candidate to fund shortfalls on another at-risk project.
Cash at the end of the Tunnel
Given all of the variables, managing your cash flow may seem to be a daunting, if not impossible task. However, there are tools to help you manage job cost, vendors and subcontractors. The key is to make sure that all of the project team members involved have all of the information they need, and that information is accurate.
How do you manage your cash flow process?