IN THE CONSTRUCTION BUSINESS…CASH IS KING
Construction contracting enjoys the 2nd highest failure rate in American industry
– right behind restaurants-
THE CULPRIT – Late payment – an industry nightmare that violates our contracts and multiplies our risk.
“I have experienced construction enterprises with so much of their reserves tied up in receivables that they could not pay their bills and were forced into the hands of their creditors.”
Take a Look…
At your own balance sheet for a minute:
- Look at – Available Cash.
- Notice – The Amount and Aged Accounts Receivable.
- Estimate – The Cost of Financing Your Work in Progress.
- Finally – Note How Much of Your Line of Credit is Drawn Down.
Keep These cash flow indicators in mind as you read on.
OUR OWN WORST ENEMY
We contractors must shoulder part of the blame for not demanding what is rightfully ours. Having been paid late for so long, we have come to think of it as normal and do nothing about it. I call this our “entitlement paradox”.
Most contractors feel they have no influence over a payment process that starts with one-sided contract provisions providing designers and owners unreasonable control over payment. Most contracts direct that a payment requisition be filled out by the contractor and approved by the designer. If the designer doesn’t approve the amount, they generally red-pencil the requisition and send it back to the contractor to be retyped. There is no contract requirement to retype the requisition any more than there is a requirement to walk the site and bargain for the amounts. In fact, retyping implies that we were overcharging and reinforces the proposition that the designer, and only the designer, will decide what the contractor will be paid. This is the inequitable payment process that has evolved over the years.
Take a Closer Look…
If the legacy payment process described above is occurring in your company, give some thought to how it impacts your costs and consider the risk of running out of cash or credit. The consequences of course is the inability to pay your creditors. Are you OK?
LET’S MAKE A NEW START
Slow pay is a growing problem, but we are not powerless in the payment process. Payment is not going to be important to anyone unless we make it important. Nothing is going to change if we are unwilling to let everyone know we are not embarrassed to say: “We expect to be paid in accordance with the contract”. We need to make it clear that our efficiency and productivity depend on our timely payment of labor, subcontracts and suppliers, and that we have no interest in investing in the project – just building it.
AND GO ON FROM THERE
Our research indicates that the construction industry needs to go back to the beginning and take a fresh look at how we manage cash, credit and our balance sheets. In this blog, we will take a fresh look at our management practices. Here are some of the topics we will be dealing with in future discussions:
- Are you at risk of running out of cash? We will discuss how to analyze your balance sheet to make an accurate appraisal.
- Do you intend to live up to the letter of all your contracts? We will not be able to be more demanding when enforcing contract provisions if we are not holding up our end. We will discuss how to make a careful evaluation of your company’s commitment to excellence.
- The occasions when a million dollars of retainage is held for months awaiting $50 thousand worth of punch list work is punitive and demonstrates that these contractual arrangements provide financial advantage and inappropriate leverage to owners. What is the current retainage amount your company is forced to endure? We will discuss an acceptable amount and the steps we can all take to minimize future retainage.
- What about future projects? It’s time to look at the contract payment provisions and consider how to cause our owners to adhere to them. For example, we need to involve owners directly in the payment process at the start of the project by clarifying what the payment clauses in the contract actually mean. We will discuss what a dramatic impact this simple attitude adjustment can have on cash flow.
LET’S GET STARTED
This blog is yours, not mine. I have felt for many years that our industry lacks a proper open forum for in-depth discussion of issues that mutually affect owners, contractors, sureties, bankers, and government agencies. You are all not only invited, but encouraged to respond and comment as we work through construction industry issues together. Welcome to your blog. LET’S TALK BUSINESS.
Join this discussion by asking questions and sharing your reactions here. We all benefit only when we share our experience.