Managing Cash Flow and Avoiding Surprises in Construction Projects
Effective cash flow management is the backbone of a thriving construction company. Brandon Manning and Zak Krauss emphasize this in their discussion on navigating the complexities of financial planning in construction. With a myriad of costs from materials, subcontractors, and labor, to unexpected expenses, the ability to anticipate and manage these outflows is crucial.
Under vs Over-Billing
In an ideal scenario, billing ahead of work completion provides a buffer—an over-billing situation that makes cash flow easier to handle. However, this isn’t always possible. The agility to handle under-billing scenarios without compromising relationships with subcontractors and vendors is a skill that requires a deep understanding of cash flow tracking and management.
The Power of Cost Reporting Meetings
Establishing regular cost report meetings is a strategic approach to stay on top of every expense and phase of a project. Manning suggests monthly meetings involving project managers, senior project managers, and project accountants to discuss details down to specific phase codes—ranging from payroll to materials and potential change orders that aren’t yet documented. These gatherings are essential to understand the financial health of each project and to prevent cash flow surprises.
However, these meetings can be daunting. To mitigate the pain points, it’s important to maintain a rhythm—holding these meetings monthly to avoid playing catch-up with a backlog of data. Preparation is key. Ensuring that project management teams receive pertinent information ahead of time enables them to come prepared with insights and questions, fostering a more efficient and focused discussion.
Building a Culture of Consistent Financial Management
The goal is to cultivate a culture where project budgets are tracked consistently throughout the month, not just reviewed periodically. This vigilance allows for better control over the project numbers and the overall bottom line, safeguarding against any unpleasant financial surprises. Delay in this process equates to diminished control over your financials, leading to those surprises that, as Krauss notes, are “never in a good way.”
Through meticulous and regular financial oversight, construction companies can manage their cash flow effectively, making sure each project contributes positively to the company’s profitability, rather than becoming a liability. This disciplined approach is essential in managing the ebb and flow of cash and avoiding the pitfalls that can catch a business off guard.
