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KEEPING THE CASH FLOWING:

10 TOP TIPS

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Tim Ellis By Phil King BSc(Hons), Technical Services Director

[Read as PDF Article]

Companies in the construction industry have sought to do business, over recent years, in an environment dominated by cutbacks and austerity.  Historians may conclude this period was worse that in the Great Depression of the 1930’s.  Looking forward companies will be hoping for increases in levels of turnover and profit however in both the good and bad times neither are a guarantee of survival.  Companies that manage their cash flow stand a far better chance of keeping their operation afloat because ‘Cash is King’.

Here are ten tips to help manage that all important resource:

  1. Payments

Most standard forms of contract provide for monthly payments which are based upon the value of work completed in the previous month. The Construction Act provides that in the event of non payment the works can, following a period of notice, be suspended.  Adjudication is also available at any time to both parties to a construction contract.  It takes less than a week to have an adjudicator appointed and the decision, which is generally enforceable by the Courts, must be published within a maximum of 42 days.

  1. Create a cash aware culture

Make sure everyone in the organisation realises the importance of cash, and understands how they can positively influence the way the company handles cash. Such awareness can extend to helping reduce on site and head office overhead costs.

  1. Understand your cash cycle

Regardless of the nature of the project there will be peaks and troughs in cash flow.  Typically, demand for cash is low in the early stages of a project but increases as the number of subcontractors on site grows.  Prepare for this by allocating the pricing against the programme activities and put in place measures to ensure your cash flow can meet these demands.

  1. Co-ordinate your payment cycle

Make sure payment dates are coordinated such that money from the employer is received before subcontractors and suppliers are due to be paid (although be aware that ‘pay when paid’ clauses are not enforceable).  Often simple account management is not implemented but such measures can help keep more cash in your account.

  1. Spread risk

Over-reliance on one supplier or subcontractor could also leave you vulnerable if they fail so use credit checks or references and dual source. If you do use one supplier or subcontractor look to negotiate discounts or discuss other incentives that make the arrangement worthwhile.

  1. Agree changes as soon as possible

Make sure all changes are recorded in writing and that detailed records of the resources used in carrying the changes are agreed as the works are carried out.  Move away from the culture of only dealing with variations in the final account. Early agreement of change reduces potential for dispute and generates cash.

  1. Credit check customers

Don’t be embarrassed to ask!  Contractors and subcontractors are required to disclose enormous detail of their financial position in order to get their names on tender lists but what about those who employ them?  Carefully vet all potential customers’ credit histories to minimise possible late or non-payment in the future.

  1. Be careful when bulk buying materials

Whilst payment for unfixed materials is allowed under the likes of the JCT contracts others do not, for example NEC.  Over ordering of materials or materials stored on site which are susceptible to damage or theft can give rise to unrecoverable costs.

  1. Chase unpaid retentions

Withheld retentions often represent the profit for the project.  Do everything you can to complete your contracted obligations and get the final money released. Unless you chase for unpaid retentions it is unlikely that they will be paid!

  1. Don’t leave accounts outstanding

Accounts that are not agreed can give rise to considerable sums of cash being unavailable to the payee. The issues preventing final agreement can often be quite easily identified and overcome.  In such circumstances it is invariably beneficial to take independent advice.

Cash flow is the life blood of the construction industry.  Many elaborate procedures are used by companies to monitor turnover and profit of individual projects however few have procedures which actively monitor and compare the flow of cash into and out of the company.  Companies are more likely to fail due to the lack of cash than due to reductions in turnover or squeezed margins.

Whilst most of these tips may seem like common sense we find that in practice they are often not carried out.

Key Contact
Tim Ellis
timellis@mbmconsult.com

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