How to keep the cash flowing

Cash flow, as they say, is the life blood of any business. You may have a business which produces great construction work for what should be a healthy profit, but if there is a slow down in money coming in, or it stops altogether, then your company is at severe risk. Construction companies have a reputation for being undercapitalised. Getting to a position where you have large cash reserves is extremely difficult in a high-risk industry where both main and sub contractors have to lay out large amounts of cash to get projects going. Ensuring you get paid on time and what you are due is therefore vital for survival. So, what can you do? There are many ways to help with cash flow, and Hawk has put together the following which give contractors and subcontractors some ideas on managing their cash position.

1 Check contract payment terms
2 Comply fully with all terms
3 Know your dates
4 Co-ordinate your subcontractors and suppliers
5 Issue an application for payment
6 Price variations and claims as quickly as possible
7 Chase invoices immediately
8 Forecast cash-flow
9 Chase outstanding retentions
10 Research and be prepared to take action
11 Related articles on Designing Buildings
12 External references

[edit] Check contract payment terms

This tip is part of the generic “read your contract” tip which is applicable to almost everything in construction. In respect of cash flow, the contract, in conjunction with any supporting legislation, principally the Construction Act [1] provides the specific details regarding what you can be paid for, when you are paid and how to apply for payment. Each contract is [1]different and even standard forms get amended by bespoke conditions, so make sure you read and know what payment terms apply to your project.

[edit] Comply fully with all terms

Contracts are generally complex documents often with many inter-linked terms and conditions. So read all the contract carefully and look out for those terms which place a restriction on the amount of money you can get paid if you do not comply with some, often unrelated, matter. Hawk typically sees bespoke amendments stating that a client can withhold some or all of a payment if, for example, a collateral warranty is not put in place. (See some of our case studies as examples: Cornerstone; Beckenham Primary; National Rail). NEC contracts also permit money to be retained until the contractor has submitted a first programme for acceptance.[2]

[edit] Know your dates

When reviewing your contract identify all relevant payment dates. Since the introduction of the Construction Act “due dates” and “final dates for payment” have become common enough terms, but when these dates occur may not be immediately obvious. Set up a payment schedule, or check the content if one is provided, so that you are clear what the payment dates are. Also include dates when applications must be made and when you should receive any payment notices or pay less notices. There is a lot to keep on top of so make sure you are organised and know exactly what is due from you, the paying party and when.

If you are not sure what a payment schedule should look like or simply don’t have one, seek professional guidance.

[edit] Co-ordinate your subcontractors and suppliers

With main contractors and subcontractors typically having an extensive supply chain, make sure that you optimise your payment timetable to best suit your cash flow. Obviously try and ensure that you receive your client payment first and then subcontractors and suppliers are paid subsequently from the cash you receive. This will also require you to carefully management the dates of applications from those in your supply chain so that you receive the necessary information to include in your application in good time. A consolidated payment spread sheet will help so that you are clear what information is needed by when, when you should receive payment and when you need to pay others.

[edit] Issue an application for payment

Under a standard JCT contract, the Architect issues an Interim Certificate, based on an interim valuation made by the Quantity Surveyor [3]. Notwithstanding the QS’s obligation to value the works, make sure that you have provided the QS with your valuation by way of your Payment Application [4]. Leaving a valuation to the QS alone is not advised whilst issuing a Payment Application has a number of benefits. You are able to advise of all matters which require payment, some of which the QS may not be fully aware of. Also, if the Architect does not issue a Payment Certificate, the Contractor’s Payment Application becomes the Payment Notice [5], i.e. the amount due for payment (subject to any subsequent Pay Less Notices).

[edit] Price variations and claims as quickly as possible

Carrying out additional work or work under prolonged or disrupted circumstances is costly. Make sure that you are aware of all additional works and use the contractual procedure for notification and evaluation. Price and submit variations and claims as soon as possible. Don’t leave them until the end as you will be financing additional work which you should be getting paid for. And remember, some forms of contract (for example JCT) allow reimbursement of loss and/or expense without deduction of retention [6].

[edit] Chase invoices immediately

Sounds obvious, but far too often late invoices are left and not chased up. If you are due money and have not received it, then chase immediately. Hawk has heard this justified on the basis of “not wanting to upset a client”, or “we don’t want to be a nuisance”. This is unacceptable, it’s your money. Chasing invoices does not have to be confrontational or aggressive. It allows you to find the “official” reason for why payment hasn’t been made so that the late payment can be resolved or you can get a feel for whether there are issues to be concerned about. Chase both the accounts department and the person responsible for authorising payment and follow up regularly.

[edit] Forecast cash-flow

Cash flow management is as much about forecasting what is due, both in and out, as it is getting money in on time. If you are aware of the inflows and outflows of cash over the coming months you are in a better position to forecast the likely pinch points and take pre-emptive action. This could include various actions such as liaising with your bank to ensure a sufficient overdraft, with suppliers to extend payment periods or rearranging non-essential payments until later. Unless you know what is going on, you cannot take appropriate action.

[edit] Chase outstanding retentions

Retentions are a thorny issue but are still widely used. And too often clients and main contractors in particular, make no effort to pay retentions when they should be released, particularly the final percentage. If you are due a retention, apply for your money. Ensure the matter is dealt with rather than forgotten. Releasing a retention may be as simply as a phone call, but if it requires more work, then find out precisely what the reasons are for non-payment and challenge these if they are spurious.

[edit] Research and be prepared to take action

If you are in cash flow difficulties, then you must take immediate action. Analyse your accounts to see what is causing the problem. Carry out some research to establish the financial status of those not paying you. Find out if other contractors or subcontractors are also not being paid. Your cash flow management should give you an idea of how long you can manage without further money. Take action promptly. Do not be afraid to contact the paying party, enter into negotiations, consider suspending the works or potentially start formal action, e.g. adjudication. Be clear, if other parties are similarly not being paid someone will lose out, so don’t delay taking action.

Do not underestimate the importance of being paid on time and managing your cash flow. There is a lot to cash flow management and it needs sufficient time devoted to it. Accurate and frequently updated forecasting is essential for effective decision making whilst prompt action is always advantageous. Think of it like steering a ship. Small adjustments once you stray off course are easier, quicker and more effective to implement than drastic action when you are miles off course.

--Hawk Surveying