The state of construction cash flow in 2021 is well below the level of comfort for most contractors; the industry is still recovering from the damaging effects of the pandemic. Our good friends at Levelset recently released the 2021 Construction Cash Flow & Payment Report, a detailed report on the state of cash flow and payments in the industry.
We wish we’d been surprised by the takeaways, but we talk to contractors every day about cash flow. We know how hard it is out there right now.
Construction Cash Flow 2021 Takeaways
· Out of the 764 respondents, 9% said that they get paid on time
· 97% experienced stress related to late payments and cash flow
· 71% of companies filed for a lien
According to the report, 33% of contractors finance cash flow gaps. Financing growth is actually a smart business move and financing a short-term project cash flow gap can actually improve outcomes on the project, but regular gaps in your operations cash flow can spell serious trouble. There is a BIG difference between financing cash flow gaps in your project versus organizational cash flow shortages. If there are continual cash flow gaps in the business that could be a sign of much greater problems.
The slow payment cycle and payment delays typical to construction contribute to cash flow issues for many contractors. Stress over cash flow impacts your company’s ability to grow AND your team’s ability to perform on the job. The good news is there are simple steps you can take to improve your company’s cash flow.
Hire an accountant.
An accountant is a partner to your business – they are NOT just someone that does your taxes. With an accountant on your team, you will be able to forecast gaps that could hurt your company and help you solve for them in advance. Knowing how to calculate and control your company’s cash flow will positively influence your businesses’ profit and revenue.
Don’t want to spend money on an accountant? Most companies find that a good CPA will pay for themselves just in the tax savings they uncover. Also, consider how much time you spend each week keeping your accounts in order. Finally, what would you be willing to pay to have peace of mind that your company is cash flow positive and growing on a solid foundation of working capital?
Communicate early and often.
Communication is instrumental in building trust. Good communication is a predecessor for good relationships. If you have questions during the bidding process or after, make sure to ask the general contractor to clarify. Doing this, as well as sending preliminary notices, can lead to punctual payments.
Some contractors are hesitant to send preliminary notices, but part of good communication is setting expectations early and clearly. Sending pre-project notices, documenting everything (even if it is just by email), and insisting on change orders all work to keep your expectations clear and present in the GC’s mind.
If a payment is delayed, reach out and ask why. Don’t assume. Keep communications positive and solution-oriented. Remember, you are on the same team working to get the project finished, preferably with a profit for both of you. Solve problems for your GC or, even better, ask them how you can help them solve the problems they are having with their customer.
Refer to How to Get Paid and What to Do When You Don’t for more information on effective communication with contractors.
Plan cash flow by project.
Estimating and tracking cash flows for each of your projects can increase your businesses fluidity immensely. By managing cash flows, you know exactly how much money you’ll need for payroll, materials, insurance and other expenses. You’ll also know when you’ll get paid (provided you get paid on time). This allows you to see the cash flow gaps on a project before they happen. It also allows a business owner the ability to mitigate risk and organize investments. Project cash flow management doesn’t only impact the specific job, it also affects the business as a whole. Healthy cash flows mean that a company is growing and expanding. Cash management and stability can be determined by tracking your cash flows.
Cash flow in construction is tough, but not impossible and not beyond your ability to control. The pandemic impacted every industry, but construction survived and has recovered swiftly — in no small part due to the mental toughness of its people, people like YOU.
We cannot go back and change the damage done by the pandemic; we must instead focus on the future. Good cash flow management is one of the biggest factors in ensuring your company’s future is bright and filled with opportunity.
This article was written by our Summer Intern, Matthew Smith. Matthew attends Auburn University (Go Tigers!) and is studying finance and marketing. Thank you for all your hard work, Matt and good luck on the new school year!
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The construction labor shortage was bad before the coronavirus pandemic; now it is a full-blown crisis. According to a CNN Business article, the construction industry lost 1 million workers during the initial months of lockdown. Now, the article states, the industry is losing workers faster than it can recruit new ones.
According to the 2020 Construction Outlook Survey, 81% of construction businesses have trouble filling positions, whether they are skilled tradesman roles or salaried office positions.
That labor shortage has a real impact on performance and profitability. According to the same survey, 40% of firms have experienced project delays, and 23% are being forced to extend completion times in bids because of staffing shortages.
There is also an impact on jobsite safety. Fewer workers means longer hours and more chances of workers performing tasks they are not experienced in. Fifty-seven percent of the construction companies surveyed listed inexperienced skilled labor or labor shortages in general as the biggest challenge to crew safety.
So, why are construction workers leaving the industry? And what can business owners do to recruit and retain quality workers?
Money isn’t the silver-bullet you think it is
According to the 2020 Construction Outlook Survey, 52% of construction businesses are looking to grow their business by 1-10 people, and almost 25% are looking to grow their team by more than 10 people. That’s a lot of open positions.
So, what makes your job offer stand out?
If your answer is Wages, think again. Fifty-four percent of companies have already increased salary rates. In fact, the national average wage for a construction worker is $32.86, much higher than the average wage in other industries like hospitality or retail.
Money matters, no doubt about it, but it is not the end-all be-all that many construction leaders assume it is. For example, workplace culture and the potential for advancement matter as much, if not more, to younger construction workers.
Besides, paying people competitively for hard work that often involves physical labor and mental toughness shouldn’t be an incentive. It should be a given.
Which brings us to the elephant in the room. Workplace culture.
Workplace culture matters more than you think
Workplace culture is driving many construction veterans to leave the industry.
Stop. Read that again.
That stereotype of the silent, tough-as-nails Joe who gets it done no matter what, who never talks about his pain or his feelings, who takes all the yelling and backstabbing without a peep …. Yeah, that guy is an illusion.
The truth is that construction workers are human, and nobody likes being treated disrespectfully. Most of us want to be able to admit we need help, or that we don’t know how to do something, without fear of bullying or punishment from management. All of us want to feel like our work matters, and all of us want to be able to spend time with the family we work to support.
Nobody wants to work in a toxic work environment, and now construction workers are starting to demand better.
This is doubly problematic, as referrals from employees is one of the best ways to find your next rock star employee. Construction is all about relationships, and friendships run deep within the skilled trades. If you have hostile managers, unrealistic expectations, and no career development opportunities, your exiting crew members will tell their friends.
Younger generations list workplace culture, community, and growth potential along with salary as the most important qualities in a new role. To recruit new blood into the industry, construction businesses should focus on culture, continuing education, and career advancement. Your culture and your sense of team matter the most to people. If you don’t have that or know exactly what that is then start right there educating yourself, your leadership team and then make the changes.
Invest early in new, diverse talent
According to the Bureau of Labor Statistics, just 6% of construction workers are Black or African American. About 10% of the labor force is women. That’s a glaring diversity problem. It’s also a labor problem.
Few minorities enter the construction workforce because they aren’t familiar with it, according to the Associated General Contractors of America. Introducing underrepresented groups to the opportunities in construction, through vocational school programs, technical colleges, and other community outreach, can help solve your labor problem and impact the industry’s overall diversity issue.
Investing in diversity is also investing in innovation and productivity. Companies with diverse management teams have 19% higher revenue due to innovation. Basically, if you need new solutions to problems, you need to introduce new perspectives.
Diversity without inclusion, however, is meaningless. Culture is also part of construction’s diversity challenge. Construction Dive recently published a six-part series on racism in the construction industry. Over 40% of respondents to Construction Dive’s related survey said they had seen racist graffiti, and 38% reported hearing verbal abuse or ethnic slurs.
Another challenge to recruiting in construction is the decline of shop classes in the public education system. These classes are often a gateway for students into the world of construction. Shop classes gave students who didn’t want to pursue a college degree a peek into the world of specialized trades in construction.
The good news is shop classes, after a sharp drop a few years ago, are starting to come back. An increase in interest in the industry has also led to multitudes of technical colleges offering certifications and local trade organizations offer apprenticeships and training.
Here’s your competitive advantage in the talent battle — get involved and stay involved.
Reach out to your local technical college and get involved in their construction programs. Volunteer to be an expert guest, or let a class visit your shop and answer questions there. Work with your trade organization to offer apprenticeships. Bringing people in as apprentices gives you a chance to show them your culture, and gives them a chance to see themselves as part of your team. Donate materials to the local high school shop class. Volunteer time to speak to the kids, or bring them to shop.
Invest in people early in their career and they will never forget you and the help you offered. Even if they don’t join your organization, or eventually leave after years of loyal service, they’ll always speak highly of you.
Labor shortages are complex problems with multiple, intersecting causes. Will building a work culture of respect, dignity, and trust at your business solve all of them? No, but having a positive, supportive work culture will help you attract new recruits and keep the rock star talent you already have.
It will also create a place where everyone, including You, enjoys coming to work.
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Cash is the lifeblood of your contractor business but getting that cash can be a nightmare. We asked Lori J Drake, CBA, Levelset‘s Payment Professional’s Community Manager, to join MF CEO Scott Peper for a conversation about the most common reasons payments get delayed, what to do if a GC payment is late, and how to keep your cash coming in on-time.
Why does it take so long for subcontractors to get paid?
The best place to start is to understand that payments in construction operate on a waterfall model. Subcontractors are at the end of that stream of cash, and so their wait is longer. It typically starts with a bank or financial institution, the one financing the owner or developer.
Are there “bad” general contractors out there? Sure. Bad owners, bad projects. But the majority of the problem stems from the macro factors around construction cash flow — things you cannot change. The owner or developer has already put in a lot of work before the project is off the ground. They typically have put a lot of their own cash in long before they secured funding from the bank or a government fund.
The GCs are in a similar boat — they have a lot to do and manage before the work starts. And of course, the subcontractor does the work, has it checked two or three times before it is approved and submitting it for payment.
Then, if you submit your pay app correctly, you wait 30-80 days for payment.
And that is another reason payments are slow in construction — a complex and laborious pay application system. Many GCs only pay once a month, and if your pay app misses the deadline or has errors, you have to wait another month before you get paid.
Lori recommends making sure everyone on the job knows you exist right from the start. “Send a preliminary notice on any job that you do. … anyone that you want to make sure that your risk is minimized. If you don’t send a preliminary notice the owner of the property, other subs, GCs — anyone in that payment waterfall — if they don’t know you exist, they can’t make sure that you get payments. So that I would say is the number one step.”
Nervous to file a preliminary notice? Don’t be. Preliminary notices aren’t a threat; they aren’t hassling your GC. They are your normal operations, your due diligence to protect your company so you can focus on PERFORMANCE. “When you do great work, you expect to be paid,” says Scott. “To keep honest people honest, we put locks on doors. To keep money flowing when it’s supposed to you let people know you’re there.”
How can subcontractors ensure faster payments?
The first step in ensuring faster payments happens before you ever put boots on the site. Check the credit worthiness of your general contractor. Levelset has a Contractor Profile tool that shows how many jobs a contractor has performed annually, how they performed, the types of jobs, and feedback from the people who have worked with them. “It gives you a whole bunch of information that you really can’t find anywhere else,” says Lori. “It’s kind of like a trade reference on the GC but with a lot more information.”
If you are working on a government project, you can relax a bit. There’s usually a payment bond in place.
Document everything. Follow the spirit and the letter of your contract. Ask your General Contractor any questions you have about documentation, change orders, pay apps — literally anything you are unsure of. Scott puts it like this, “I had a boss that used to tell me, ‘You know, Scott, I can protect you from anything, you just have to make yourself bulletproof. If you’re in the construction world, and you have a contract that says you need to do something specific each day or each week, then do it. Keep yourself bulletproof.”
Submitting the preliminary notice also helps speed up payment. It lets everyone on the job know that you exist and that you are doing your due diligence to get paid. You can also send conditional waivers with each invoice or pay application. The GC has to sign it, acknowledging what you are billing them for, and agreeing to contact you if there are any issues.
Submit demands for payments promptly. If you have 20-day terms with your GC, then remind them you are still waiting for payment on day 21. Don’t worry about appearing annoying (unless your approach is to be annoying, in which case slow payments are not your biggest problem.) “The ones that ask questions are the ones that get paid faster,” says Lori. “If you’re not asking, they’re not worried about it.”
Finally, you can speed up payments with technology. Accepting online payments and credit card payments eliminates the wait for paper checks to make it through the mail. It also removes the chance that your check gets lost in the mail. When you get paid online, you get your money immediately. “Most GCs love to pay with a credit card,” says Lori. “They get rewards off it and get another 30 days to pay their credit card. If you can find a way to do that, it’s definitely going to be in your favor.”
What to do when a payment is late?
A popular, if drastic, option is a mechanic’s lien. It’s important to know the laws in your state — when you have to send a preliminary, when you send a first or second, when you file a lien, when you have to foreclose on a lien, etc. This course of action can lead to negative repercussions, but it is a way to get recourse and get your money back.
Get everything in writing. If your contract says that the GC is supposed to pay in 30 days and it’s day 33, that’s a breach of contract. If the GC doesn’t do what they are supposed to do, even in the smallest detail, it is a breach on contract. Lori says, “If you had any inclination that this person isn’t going to pay you even prior to sending notices, you can file suit on that and then continue to send notices. It’s a very strong law that does get played out a lot.”
Scott adds that working with a construction lawyer can help avoid payment issues and get you paid when an issue arises. Because contract laws, and contract language, can be hard to interpret and different laws and policies can help or hurt you.
For example, if you have a Paid When Paid clause that you’ve agreed to, it may impact your ability to utilize a prompt payment law. A contract lawyer can help you remove some of the ambiguity. Scott says,
“One hour of an attorney’s time to review your contract can pick the four or five or six main clauses that can keep you from a real disaster.”
Simple things like good documentation and good communication with the GC upfront can make a real difference, adds Lori. “Stay on top of your deadlines. Make sure you keep in contact with people. Stay aware of what’s going on with each project and everybody that’s on it. It’ll make a big difference.”
Contract financing is a way for businesses that operate through contracted work to secure funds in advance of the work being performed. If you’ve ever turned down work because you didn’t have the cash flow for the initial labor, materials, or other costs associated with the project, contract financing might be the financial solution for you.
What is contract financing?
Contract financing alleviates the cash flow gap that occurs when you have expenses related to a new project contract, but will not be paid by your customer until after the work is underway or completed. The financing is a loan collateralized by your contract. Contract financing differs from invoice factoring in that the advanced funds are available before you send an invoice. Also, you still own your receivable.
Funding limits vary, but typically a contract financing firm will lend up to 20% of the contract value. (That is Mobilization Funding’s funding cap on contract-backed loans, as well.)
Who does it help?
Contract financing works best for businesses that have a solid performance history and are growing faster than their free cash flow can accommodate. These businesses usually have their operational cash flow management under control, and may even have other forms of funding available such as SBA loans or credit lines from their bank. However, contract financing allows them to grow securely by accepting large contracts without straining their cash flow or drying up their other funding options, which are better utilized elsewhere.
For example, let’s assume Lightning Man Inc. is an electrical contractor in Tampa, Florida, owned by Joe Mitchell. The company has an annual revenue of about $2 million, and is in a phase of rapid growth. They’ve just been awarded a $1.8 million contract with a GC. The work includes all electrical systems in a new corporate campus park. The contract is Paid When Paid, with monthly billing at the end of every month. Joe knows he’ll have at least three payroll periods for his crew, not to mention supplies and materials expenses, before he’ll even submit his first pay app.
A contract-backed loan allows Joe to cover those expenses without dipping into the cash flow for his other projects or the operating cash he needs to pay for his overhead expenses. It also means he can save his bank line of credit for other organizational costs associated with Lightning Man’s growth.
Contract financing isn’t only for construction contractors. If you earn revenue through contract work, and you could use funds to cover the initial costs of that work, contract financing may be a viable funding solution for you.
How does contract financing work?
Let’s stay with our friend Joe aka “the Lightning Man” for a bit longer. Joe knows he needs payroll money before he sends an invoice, so invoice factoring can’t help him here. He calls Mobilization Funding — we’ll use ourselves as an example to keep things easy — and asks about contract financing.
After a quick preliminary chat, one of our team members tells Joe, “It sounds like you’re a perfect fit. You have a great work history, this work is right in your wheelhouse, and your business sounds solid. I’ll send you a follow-up email with our next steps.”
Here’s what a contract financing company typically asks for:
- A complete loan application
- Owner identification
- Copy of the contract for the project
- Company financial documents such as bank statements, tax returns, income statement, balance sheet, and an accounts receivable report
With the copy of the contract, Joe and our Project Funding Manager sit down to create a Cash Flow Schedule. (We have a sample Cash Flow Worksheet available on our site. Click here to access it.) This shows Joe when his project will have cash flow gaps that our loan can cover, and when the project will be self-funding. We align our repayment schedule to when Joe’s customer will be paying him, so that he doesn’t have to use his organizational cash flow to pay us back.
The loan documents are executed, and a bank account under the name and Tax ID of Lightning Man Inc. is opened for the funding. Since the loan is based on the contract, it is imperative to the lender that all funds for this job stay on the job. Through the execution of a funds directive, all monies associated with the project come through this bank account.
In the end, we loan Joe $200,000 for labor and sub-labor on the project. He pays us back in installments as he receives payment from the general contractor. Joe is able to start the job with the right amount of labor and all the materials he needs, which actually ends up saving him money through his team’s efficiency. He completes the project and earns a healthy margin. Best of all, the GC appreciated Joe’s ability to expedite his work and stay ahead of schedule. Lightning Man Inc. has a new and important ally in its quest for growth.
When your business has the cash to start new work without sacrificing other projects, or cash that can be used for other business expenses, your team can get to work with total confidence and YOU can focus on your real job — growing your business.
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We’ve created a lot of resources about the importance of cash flow management for your business. Let’s take a step backward and start at the beginning. What IS cash flow and why is it so important to understand your company’s cash flow?
What is Cash Flow?
Cash flow is the net amount of cash (and other cash-equivalent assets) that move in and out of your business. They flow in when cash is received — which is called inflows — and they flow out when money is spent (outflows).
Cash flow is often referred to as “the lifeblood of your business,” but another analogy is that cash flow is your company’s oxygen. Cash must flow in, and cash must flow out. This flow of cash in and out of your company is needed to keep it breathing — to pay your team and your vendors, to invest in growth and to heal from unexpected challenges or adversity.
There are several types of cash flow business owners should know, understand, and track. Let’s quickly define these, along with a few other terms you should understand in order to manage the finances of your business.
Operating cash flow is all cash generated by the purchase of your company’s main service or product.
Investing cash flow includes cash generated by investments in capital assets or other ventures.
Financing cash flow is the money you take in from debt or equity, less the payments you make on that debt or equity.
Positive cash flow shows that your cash flow is increasing — more money is coming in than out.
Negative cash flow, conversely, shows that your company has more outgoing money than incoming.
IMPORTANT NOTE: Cash flow can shift from positive to negative or vice versa from week to week or month to month. This is why proper cash flow management is so important.
Free cash flow is the money leftover after all expenses are paid. Free cash is one of the most important aspects of cash flow management, as it determines your ability to grow, to recover from a bad project or a bad season. Free cash flow can also impact your team’s performance.
Operating account is the general bank account used to process most of a company’s expenses. Many businesses run everything through an operational account, however, we recommend setting up at least one separate account.
Payroll account is a bank account reserved for payroll activity. Separating this from operations ensures you always have enough money for payroll, and that you can easily track payroll separate from other expenses, ensure the payroll taxes are paid, and any other employee related compensation associated to the business.
How cash flow relates to profit
Obviously not all of the money generated by your company’s activities is profit, but it is all part of your cash flow. Knowing how much of the revenue generated is profit, or free cash, and how much must be reserved for expenses, is critical to cash flow management and the vitality of your business.
It is entirely possible to be profitable and have a negative cash flow. This is especially common if there is a long delay in payment and whether or not you are running using Accrual or Cash based accounting. It is also possible to have a positive cash flow and not be profitable. For example, if a construction contractor company is taking on some additional debt or factoring their receivables they could likely create positive cash flow for a certain period of time. However, if the company’s bids are too low to accommodate overhead and project expenses, or the company’s debt payments or overall expenses are too high, the company will not be profitable despite the additional cash created by the loan or factoring.
Managing your company’s cash flow
The first piece of advice we give clients struggling with cash flow management is, Hire an accountant. Preferably a CPA. This first step is a huge differentiator. The accountant will create a structure to manage your books and your business
A lot of business owners start out managing their own books, only to discover too late that business financial management is far more complex than balancing your household checkbook. Hiring an experienced accountant or CPA pays for itself when you consider:
- the time you’ll save NOT keeping accounts in order, cutting checks, and worrying about the business bank account
- the late fees and overdraft fees you WON’T incur when someone is properly managing company finances
- the potential revenue-generation strategies your accountant will uncover by analyzing your company financials
- the stress relief AND potential savings when taxes are in order and returns filed properly
- the growth you’ll experience when you have a financial game plan that supports your goals
PRO TIP: We see companies that hire and work with an accountant all year save thousands of dollars — more than what the accountants fees are — just in tax savings alone. Many business owners think accountants are too expensive and hire them at the end of the year just to do the taxes. At that point they are very likely not getting any real value, compared to if that accountant was in place all year long and set up the financial system from the beginning.
Whether you hire a professional to manage your accounting or continue to manage it yourself, you need to educate yourself on your company’s financials. What is your monthly overhead? What terms do you have with suppliers? What profit margin are you currently averaging on new work? Even if a CPA is pulling these numbers for you, it is important for you to understand them in order to know what actions you need to take in order to keep your business profitable and growing. This is also the real hidden value in having a CPA / Accountant on your team.
The last tip is to track your cash flow. Expenses can shift and new work or growth can mean new costs as well as new revenue. Tracking cash on a regular basis (weekly, monthly, quarterly, depending on your business’s needs) and estimating the expected flow on projects lets you see problems in advance and solve for them.
Want more cash flow tips? Read this blog next:
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Purpose-driven goals shifts a company’s objectives away from performance and financial targets and toward larger goals that help fulfill your company’s purpose. Don’t worry — we’re not saying you shouldn’t pay attention to sales, revenue, or new client acquisition. You absolutely should, we do too! But one way to ensure you reach those goals is to align them to your purpose.
Give your financials goals a purpose-driven WHY.
Why More Money isn’t the Goal
Raise your hand if your company’s biggest or only goal is tied to a revenue number.
Wrong idea. Put your hands down.
Why isn’t more money the primary goal? Because unless it is tied to something purposeful, more revenue doesn’t mean you will have more money or have power to improve your life, the lives of your team, or your larger community. For example, we talk to lots of business owners who have grown their company from $1 million in revenue to $5 million. They thought more money would lead to less stress and bigger paychecks but found that the opposite was true. They were working more and taking home the same paycheck with way more stress!
WHY was the money necessary? What was it supposed to do and HOW was it supposed to do it? A purpose-driven goal aligned to a top-line revenue goal would have helped solve that.
Growing your top line revenue from $1 million to $5 million will probably change your business, but it might not necessarily change your life or the lives of your team members unless it is profitable, sustainable, and rewarding. Rewarding is defined as tied to a specific purpose that you and your team are aligned to.
In fact, if your team is already feeling overworked and unfulfilled, more revenue only means more work to do and an even greater lack of fulfillment.
Why Purpose-Driven Goals are Good for Your Team
Purpose-driven goals are shown to inspire teams and improve performance. Money without purpose can drive short-term performance, but it can’t stop things like burnout and employee unhappiness. In fact, Harvard Business Review says that when money is the goal, burnout is more likely. The research was related to entrepreneurs, but we can all relate to feeling drained by work rather than energized by it.
You want to see your team jump up and hustle? Give them a goal they can care about. It might be directly related to your company — like building an outdoor lunch area or a company retreat — or it might be something external, like supporting a charity or organization in your community. Whatever it is, make THAT the goal, and draw a line directly from it to the team’s increased efforts. They’ll stay motivated and more revenue will naturally come from their inspired performance.
Making money is the thing that facilitates the goal. It’s the fuel in the car that is getting you to your destination. It’s NOT the destination.
Our CEO Scott Peper shared an example of purpose-driven goal setting at the Tampa Build Expo, in his class Building a Business with Purpose. He said:
We have a culture initiative at MF called “The One More email.” It is from a line in our core value LEADERSHIP THROUGH ACTION. It says, “Do one extra thing for each person you come in contact with each day.”
To encourage this core value and celebrate each other’s hard work, every MF employee sends out an email on Friday with one example of a “One More” that they did for someone else.
They also get to nominate each other for something extra. The winner each week wins a prize like a gas card, Starbucks card, or even an extra PTO Day.
I expect 100% participation. Here’s the interesting part: The prizes are not enough of an incentive. My expectation that they all contribute isn’t enough of an incentive.
So, I set a goal. The goal is not “100% participation.” The goal is “up to $600 for a charity you care about.”
See, leadership puts money toward the donation every week that we have 100% participation. The team selects the charity every quarter. It is always something they care about passionately. We have donated to K9s for Warriors, the Construction Industry Alliance for Suicide Prevention, and a charity called A Kid’s Place, which works to keep siblings in the foster system together.
The team absolutely crushes it. Why? Because they rally around the CAUSE they are supporting.
Find something your team can believe in, something that will improve their work, their lives, or their community. Make THAT the goal. Then show them how increased revenue will help them achieve it.
Tips for Purpose-Driven Goal Setting
Set individual KPIs. Once you have a goal tied to a performance or revenue objective, you have to make sure that each team member understands the key metrics in their specific role that will contribute to the overall company goal. Work with them to set Key Performance Indicators (KPIs) around their own work that show progress toward the goal.
Goals should be ambitious. They should motivate your team to work harder and collaboratively. But, setting goals too high can have the opposite effect; unattainable goals set by management can feel like a setup for failure. Make sure your goal stretches your team but doesn’t break it.
Milestones should be achievable. If goals are ambitious and lofty, the milestones you set to show progress should be achievable. Think of it like this — if you have a goal to run a marathon, your indicator would be “miles run daily” and your big milestones might be one mile, 5k, 10k, half-marathon, and full marathon.
Set a goal that is bigger than your business, defined by your Purpose Statement, and easily measured by a relevant indicator. Communicate the goal with your team, why it matters and how you will track progress toward the eventual finish line.
Join us in making 2021 your Year of Purpose. Subscribe to our newsletter and we will walk through this journey together.
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Cash flow management is essential to a construction contractor business. Every business shares a common need: Cash. It pays the bills, it keeps the lights on, it puts food on the table. Cash isn’t just king — it’s LIFE. Yet for many contractors, this critical aspect of their business is managed ineffectively or not at all.
We invited Suzanne Cox, CPA, CIT and shareholder at Saltmarsh, Cleaveland & Gund, to share some of the cash flow management strategies she recommends to her clients. Step one, she says, is to understand where your cash comes from, and where it goes. “If you haven’t done a formal cash flow for your business previously,” says Cox, “it’s a great exercise to walk through.”
Catch the entire conversation with Suzanne here:
Creating an Organizational Cash Flow
While we recommend working with an accountant, preferably a CPA, your first business cash flow doesn’t have to be a complex document filled with formulas you don’t understand. Start simple: What are your sources of cash?
There are three major sources of cash—operations (company revenue), investments, and finance (loans, lines of credit, equity raise). Most of a typical contractor’s cash flow will come from operations, from the work you perform. When you bill your customers or submit a pay app and then get paid, that’s a primary source of cash. Consider if you have other sources as you prepare your cash flow statement.
Now that you have your sources of cash, list out all the uses of cash in your company. Payroll, materials, insurance, fuel, all count as uses of cash. Don’t forget the overhead expenses it takes to run your business—rent or mortgage, vehicle payments, utilities, supplies, marketing or advertising, etc.
Bonus: Knowing your true overhead is critical to smarter bids that secure a good profit margin on every job. Learn why in our article Margin vs Markup.
Cox says that cash flow statements aren’t just for your organization; you should complete one for each new project as well. She says, “It’s very important to not only project your sources and uses on a company wide basis, but also on a project wide basis.”
Cash Flow Tracking
We created our Project Cash Flow Tracker (get yours on our Resources page) because we knew it was important for contractors to see how project expenses marry up to the job schedule and exactly how much cash is needed each week. The same is true for your organization. The cash you have in your bank account isn’t necessarily the cash you have free to spend. You need to know when cash is needed, what it is needed for, how much is needed, and where it is going to come from.
Tracking cash flow across your entire organization can also help you break the habit of borrowing from one project’s cash flow to start a new one. Instead, you can estimate costs for a new project, analyze your current cash flow statement, and make an informed decision about how you’ll fund that next big job.
Creating a cash flow statement and tracking cash flow across projects and throughout the organization can be a real eye-opener, says Cox. It can reveal cash flow gaps in advance, as well as highlight some areas where you could conserve cash. “In construction, contractor owners are very focused on the work, they’re focused on getting the job done, they’re focused on doing a good job, they’re focused on not getting sued. There are all these priority items in your business that take precedent. Making sure you meet deadlines, and you don’t have liquidated damage charges, things like that. And so sometimes the operation of the business takes a backseat. Just the exercise of walking through a cash flow is beneficial. What do I need to make my business run? Where may I be overspending? You’re looking for things you don’t need to spend money on that maybe you are spending money on.”
Whether its rethinking terms with customers or suppliers or reducing overhead, you can’t improve your cash flow until you are keeping track of it.
Cash Flow Tips
How you manage your company’s cash flow can mitigate problems or compound them. Treat your company like a project, with a fixed budget and an approved list and schedule of expenses. (Actually, some of you may want to treat it better than a project budget.)
A good understanding of your company’s cash flow can reveal gaps in cash flow and help you spot solutions. Can you decrease your payment wait time? Should your next contract be negotiated as paid within a certain time, or based on milestones. Those kinds of decisions impact the project and your organizational cash flow.
Don’t be afraid to be honest with your general contractor, says Cox. “A lot of subcontractors feel like their hands are tied, and that they’re going to have to do whatever the GC wants. But if you explain to the GC, ‘I’ve got this situation, I need to get paid at these times’ and collaborate and come up with a mutual agreement that they want to use, they’re going to try to come up with a mutually convenient situation.”
Decreasing payment time can also be an incentive. Offer to pay suppliers upfront in exchange for a percentage discount. Similarly, see if your GC offers a discount to speed up your payment time. To make this strategy work, you need to already know what cash sources you have, what uses you expect, what you need, and what you can offer.
Cash Flow Management for Contractors
So, who does all this cash flow management? We recommend working with a CPA, but it is also important, depending on the size of your business, to have a good accounting team or person. Communication is key for cash flow management to work. If you are not getting the reports you need, work with your team member or CPA to get them.
Your accounting team and your project teams need to start talking, too. Weekly team meetings is probably one of the most important things that you can do, says Cox. “Include your project management team with your accounting team. Some of you might be thinking, Oh, my god there’s no way that’s happening. My accountants cannot be in this meeting with my project team.” A transparent and clear line of communication between accounting and project management is key for both parties to see how their decisions impact each other. “Whatever you need to do to make it work, make it work.” If an initial estimate had 100 square feet of tile, and now you need 400 square feet of that tile, your accounting team needs to know if the project manager is getting a change order for the extra 300, or if the company is eating that cost. Because if it was an estimate problem or your company is absorbing the cost for some reason, your cash flow just went down by 300 square feet of tile, and it is your accounting team’s job to budget for that.
“That’s my top tip,” says Cox, “go back and talk to your people and try to get them to talk to each other.”
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A construction contractor’s Schedule of Values is just as important to the project’s success as the bid. It also can help you get paid faster, retain more margin, improve your cash flow, and even improve your team’s performance.
That’s a lot VALUE hidden in your Schedule of Values. To cash in on all of that power, you need to build your Schedule of Values with the same strategic consideration that you apply to your initial bid.
Building a Valuable Schedule of Values
Get granular. If you are installing the windows in a five-story apartment building, think about the time it takes to haul windows up to the second, third, fourth, and fifth floor. How many times does a crew member have to come back down? If you have the same labor rate and time for each floor then you are going to lose money on one or more of those floors. After all, it takes more time for your team to get up and down, wait on the elevator, deliver material, or even just run back to the truck from the higher floors.
Get specific. Make sure your ability to invoice isn’t contingent on another contractor’s performance. If your plumbing company is laying underground or foundational piping and the original Schedule of Values defines “complete” as “Capped & Sealed,” your invoice might very well be reliant on the concrete pour schedule. Align your Schedule of Values as close to your job schedule as possible, so you get paid for the actual work you did during that application period (i.e. month).
Get confident. Just like your bid, you need to be able to show your work when you submit a Schedule of Values and it needs to be easily verified as complete so you can get PAID. Leave as little room for subjective interpretation on the line items as possible. Be thinking, “To do a great job I need my money to be paid to me in order to maintain the quality work you expect of my company.”
Be Careful Where You Put Your Margin
Are you putting most of your project’s margin in material line items? It seems like an easy win, especially if you can negotiate good supplier terms.
Unless something goes wrong, like the cost of material goes up, or materials get cut from the job, or the General Contractor decides to buy the materials themselves.
Don’t leave your profit margin up to chance! If you put your profit margin in certain line items and remove it from others, then you need to make SURE the overall margin you intend to make is still there when you invoice.
It’s construction; a lot can go wrong, and at least one thing definitely will. You need to make sure that you are able to get some profit billed into every invoice it’s the life blood of your business.
Also, if you are putting your margin in certain line items, you better let your Project Manager know. They need to be aware of how that next materials order, or any Change Orders they receive, will affect the margin on the job.
How else do you spread your margin? You could add a percentage to every line item, or you could boldly list it in your bid. This is a power move. It says to the GC, “I know what my company is worth and what it takes to do the work we do.”
If that route feels a little too bold, take a look at your project’s Cash Flow Projection (you have one, right?) and spread your margin across line items so that your project cash flows itself faster and stays profitable throughout.
Download our Project Cash Flow Tracker Tool
Don’t forget the instructions!
Complete Your Schedule of Values with Cash in Mind
How would you do the job if money were no object? It’s not just a daydream; it’s the first question you should ask when creating your bid and your Schedule of Values. If money was no issue would you run the schedule of the job differently and would it allow you to make more money by saving time and being more efficient?
It’s not just a matter of WHAT your profit margin is but WHEN you make it. If your margin is too thin or locked up in retainage, you’re impairing your team’s ability to perform at their peak and limiting your company’s ability to grow, or worse you may even be putting your company in jeopardy by limiting the free cash flow to the overall business needs.
What would the project’s cash flow need to look like to increase efficiency in the project? What would it take for you to start the job with materials on hand and a full-size crew? What would two weeks of saved labor costs do to your bottom dollar?
It can make a REAL difference. Take the 5 minutes and watch this video to see what we mean.
You can do this, too. All it takes is asking the right questions.
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A smart construction bidding process can not only help you win more jobs, it can help you fund your company’s growth and success. That may seem simple — bid more, win more, make more, right? — but the relationship between bidding and growth is more complex and filled with more potential.
If you are planning substantial growth for your construction company, optimizing your bid strategy should be part of your bidding strategy. Here are five tips for construction bidding that maximizes growth.
Be Early to Bid.
The first tip is to simply get a head-start on your competition. Keep an eye on bid platforms like BidClerk and ConstructConnect.
Rushing to throw together a bid just to be FIRST is a good idea poorly executed. Before you start watching bid platforms, optimize your bid strategy and polish your bid template so when opportunity strikes you are ready to grab it. A good bid template should include categories for all things that matter on a specific job and include the correct way to allocate overhead and profit. It should follow a specific and repeatable process to produce an outcome you can rely on.
Bidding first doesn’t mean you bid on everything. We’ll talk more about that in a moment.
Do the Homework.
First, the legwork. The more information you have before submit your bid, the smarter your bid will be. Study those drawings, specs, and plans. Make sure you see any potential problem areas and account for them in your bid. If something is designed in a way it can’t be built or will be very problematic make sure you make note of it in your bid. As part of your construction bidding process, make time to identify the decision-makers. If you are new to the GC, introduce yourself and your company. People want to do business with people they know and trust; building a relationship with the GC will help your company’s growth whether you win this particular bid or not. Include for the GC a list of references, jobs completed, and pictures of what you have done. This goes a long way and the attention to detail you show in your bid will be a great indicator of what they can expect from you if awarded the job.
Show Your Value in Your Bid.
If we only gave one construction bidding tip it would be this: BE CONFIDENT!
Confidence means highlighting your company’s expertise. You want to prove to the general contractor that your team, under your leadership, is by far the best answer to their need. Showcase your history and reputation too, and any special differentiators that a GC will care about. For example, REAL MF’er and Alphapex owner Charles Covey is proud that the Texas-based waterproofing company was the first large subcontractor in the United States to train 100% of its field staff with OSHA 30 certification. That’s a huge differentiator for general contractors and he definitely highlights that on his bid.
Showing your value also means showing WHY your bid numbers are what they are. Don’t be afraid to list out in a letter or even just simple bullet points what that GC / Project Mgr. can expect from you and your team if awarded.
Bid on Performance, Not Price.
When contractors are ready to grow their business, many decide to lower their bid price in order to win more bids. Unless your profit margin is so exceptionally large that it is unreasonable, don’t sacrifice your margin for bid wins. The GC cares about the price of your bid only once they KNOW you can perform. Performance and trust are the key for the GC and a smart bid focuses on performance way more than the price.
Far more common is that your profit margin is barely enough to support the project, let alone fuel any potential growth. Cutting margin to win a project is undercutting your chances for success on the project and crushing any chance for growth. Don’t forget – it’s about growing your business not winning one job!
Your first action item for smarter bids, then, is to know what your profit margin needs to be. Next, figure out your win rate. If you win 10% of the jobs you bid at a profit margin of 20%, don’t lower your margin. Bid MORE jobs at the same margin!
The additional jobs you win should fuel your growth strategy.
This strategy relies on confidence, as we mentioned earlier. You need to confidently and clearly show WHY your costs are what they are and how your team’s special blend of skills, experience, and culture are worth your bid price.
Bid More, but Don’t Bid on Everything.
Bidding on jobs with problematic schedules, very little room for profit, or that are being handled by a GC with a reputation for late payments, can actually cripple your growth plans. Don’t take on busy work that has your team spinning its wheels. Taking too much risk for one job is not worth ruining your business or setting it back a year.
This is where the first two tips come in handy. With a solid bid template and bid strategy in place, you can use bidding platforms to see the projects first and produce solid, performance-driven bids faster than the competition.
Better Construction Bidding is Part of Your Growth Strategy
Construction bidding isn’t just about winning; it’s about what that win means for your company. When it comes to growth, that means bidding more and bidding smarter so that you can continue to perform the excellent work you’ve built your reputation on AND power the growth goals you set for your company.
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Cash flow is one of the most important factors of your construction company’s success. Good organizational cash flow management provides financial security for today and the stability to grow in the future. Cash flow also impacts performance. Specifically, the cash available for a project has a direct impact on your team’s ability to do its best work.
Start New Projects the Right Way
One of the biggest challenges commercial construction subcontractors face is the cost of starting new work. Thirty days before you submit your first pay app, your company will have to pay for labor, materials, supplies, equipment, bonding, insurance, and other costs. If you are paid on time, you still wouldn’t recoup any of those expenses for another thirty days. Knowing the issue with slow payments in construction, it is safe to assume you will wait even longer than that.
The upfront cost of new work requires you and your team to make some hard decisions about labor, materials, and other expenses. There is a better way — project cash flow management.
Download Our Free Cash Flow Tracker
Don’t forget the instructions.
Manage the cash sources and uses of each project just like you would your overall business. Estimate the project’s capital cycle as part of your bidding process to determine exactly how much cash you will need on hand to start a project with the optimal amount of workers, materials, and so on.
Estimating project cash flow can also help you make a better decision about HOW you will finance the start-up costs. If you are not using free capital (cash on hand not reserved for other expenses), you can research your best financial solution. Whether you choose a bank line of credit or a commercial loan product like ours, you can build the cost of financing into your bid.
And whatever you choose to finance new work, PLEASE read this before choosing a Merchant Cash Advance.
Avoid Delays with Good Cash Flow Management
The majority of delays in construction are due to cash flow. Can’t fund payroll? That’s a cash flow problem. Not enough funds to rent the Big Crane? Cash flow problem. Hurricane rips through town and destroys the site? Okay, that one is not a cash flow problem.
Forecasting your project’s weekly cash flow will help you spot the “danger zones” — the weeks cash is tight, your nervous about making payroll, and/or you spend the week chasing down people that owe you money. Spotting those danger zones in advance allows you to proactively manage them before they are a problem and gives you the chance to come up with solutions in a much more controlled and less urgent manner. There are lots of proactive solutions: explore your financing options, negotiate different terms with your suppliers, or discuss the schedule with your General Contractor.
That’s right — talk to your General Contractor. About money. Seriously. Listen, your GC wants you to do your best work so they have a successful project. You share a common goal. Bring an issue to them proactively, with an idea of how to solve it, and they are more likely to thank you than judge you. Bring them the same problem when it is in the middle of the job and it’s a different story.
And if they give you grief, send them our way.
Do More Work and Do it Better
Cash flow management allows you to make strategic decisions regarding your company. Where do you want to be in a year? Data will not only show you if you need to make changes in the company, such as reducing overhead, but also which types of jobs are most profitable for your company and should be on your target list for growth.
With good project cash flow management, you’ll also know you can take on those new projects, how much cash you’ll need to do them right, and how you will finance those expenses. And that may be the greatest benefit of cash flow management — the confidence that your company is secure, successful, and growing.
Ready to change the way your team performs? Answer 3 questions to start your application today!