Cash flow is the lifeblood of the construction industry. But every project is different from start to finish, and contractors face many variables and cash flow challenges. With that said, there are several strategies to improve and increase cash flow throughout the job life cycle.
1. Negotiate upfront for reduced retention.
This is one that we often see people scared to try, but it pays big dividends. Go for it! Here are a few options that can be effective:
- Zero retention — if you have a strong long-term relationship that’s built on quality work, on time and no call backs, then why not?
- 5% instead of 10%
- Reduce to 5% at 50% complete
- Reduce retention to 1% at substantial completion (this could be defined by CO or 98% complete or punch list complete)
2. Implement a mobilization draw, deposits, and/or pre-billing.
When put into practice, these tactics can put up to 50% of the job into cash up front, preventing the project from becoming a drain on your cash from the get-go.
3. Bill ahead.
Instead of only billing the costs you have in the job as of today, bill ahead for the costs that will hit the job in the next 2-3 weeks.
4. Bill early.
Customers like to receive their bill early, and general contractors need your bill in order to get it paid. Do them all a favor and send them the invoice.
5. Bill often.
Some people only bill once a month. What if you challenged yourself to bill more often, especially if you have a service department? You must bill weekly.
6. Make collection calls.
You have done the work, and you deserve to be paid. Pick up the phone and get the status of payment.
7. Paid when paid.
These clauses sometimes get a bad rap, but it is hard to pay others when you haven’t been paid. Timing your vendor payments for when you will receive cash will keep cash flowing.
8. Negotiate terms with top vendors.
Your top vendors are partners in your business, but sometimes it feels like you aren’t the customer. Discuss and set terms that are a win-win. If you aren’t being paid for 60 days, why do they get paid in 15 or 30? Look at early-pay discounts and leverage price lists.
9. Start the end early.
This includes a zero punch list goal, O&Ms, training that will need to be filmed, red-lined drawings, etc. Keep the end in mind.
10. Manage change orders.
Putting change orders off until the end of the job doesn’t make anyone happy. No one likes surprises — this includes customers, subcontractors, vendors and YOU!
We hope these tips have given you some inspiration and motivation to increase cash flow during projects. If you struggle with cash flow management in your business, check out our Cash Flow Control course. In just twelve weeks, we’ll help you better understand your cash flow and implement strategies to increase your construction business revenue.