5 Problems and Solutions to Common Construction Cash Flow Problems
If you’re in the business, you are likely painfully aware of the construction cash flow problems faced by GCs and subcontractors alike.
But knowing that there are cash flow problems in construction is entirely different than being able to solve them.
This guide will help you actively identify your cash flow construction issues and navigate how to fix them so you can start seeing more money in the bank.
Table of Contents
- Flexbase: Your Solution for Construction Cash Flow Problems
- Why Is Cash Flow Important In Construction?
- 5 Common Construction Cash Flow Problems
- #1: Progress Payments
- #2: Slow Paying Customers
- #3: High Payroll Burden
- #4: Slow Invoicing
- #5: Paying Cash For Assets
- 5 Solutions to Construction Cash Flow Problems
- #1: Utilize Working Capital
- #2: Negotiate Payment Terms or Offer Discounts for Early Payment
- #3: Automate Your Invoices
- #4: Process Change Orders Quickly
- #5: Protect Your Right to File a Mechanics Lien
- Why Is Cash Flow So Difficult?
- How Flexbase Can Help Solve Your Construction Cash Flow Problems
Flexbase: Your Solution for Construction Cash Flow Problems
If you’ve ever Googled “cash flow management in construction industry” to see if you could find some quick fixes, you know how widespread construction cash flow problems are in the business.
Chances are you were greeted with dozens of pages about the challenges and typical delays that occur due to late payment.
With a Flexbase subscription, though, your cash flow headaches are a thing of the past.
Thanks to discounts, intelligent reminders, and our ability to automate paperwork and invoices, our customers get paid 63% earlier, on average.
With Flexbase, you can:
- Streamline all of the paperwork required on a project
- Prequalify for working capital by our preferred lenders; and
- Get money in your account quicker.
Plus, if AIA billing is required for your job, Flexbase can automatically generate the AIA billing forms needed.
Not only do our customers reap the benefits of automated AIA billing forms, but our integrative software also ensures you get paid sooner with tools like
- Project tracking
- Payment applications
- Legal reminders
- And much more
On top of automating the entire payment process, you’ll have access to our payment reminder process which escalates from auto-reminders all the way to lien filings, all for free.
And at Flexbase, we don’t get paid unless you get paid.
And you won’t pay an arm and a leg for your subscription — we operate on a commission of just 0.5%.
Our automated platform is your solution to a broken system and makes the payment process work for you.
Why Is Cash Flow Important In Construction?
Construction companies that have a “positive” cash flow have more money than liabilities. Maintaining positive cash flow allows companies to:
- Cover their bills every month
- Pay workers on time; and
- Afford to grow their business.
5 Common Construction Cash Flow Problems
In the first four months of 2018, a survey known as the Construction Cash Crunch Report was conducted that included 195 construction company owners and managers to establish:
- How often they experience cash flow problems; and
- What impact this has on their businesses.
The majority of the respondents (87%) work for or own companies that employ 50 employees or fewer.
More than half work for smaller companies, with 54% reporting their business has 15 employees or fewer.
The common thread?
- 19% of respondents said cash flow was a constant problem.
- More than a third reported only getting paid when projects are completed.
- More than 57% do not incentivize early payments or add interest to late payments.
- 5 percent say cash flow prevents their business from growing.
- 17 percent say cash flow affects payroll — and for 25 percent of these respondents, that means employees do not get paid.
So why are these numbers helpful?
They help identify the root of your cash flow problems. Construction industry workers already have a job to do and being tasked with finding solutions for problems that plague the industry isn’t part of the job description.
In the following sections, we’ll break down five of the most common construction cash flow problems so we can focus on the solution.
#1: Progress Payments
More than a third of construction industry workers who participated reported that they only received payment for their work after projects are completed.
But why is this so common?
The way the payment chain works on a construction project, payments filter down from the property owner or lender down to subcontractors and suppliers.
When there is a delay in payment at the top of the chain, payment to the lower tiers happens later and later.
Therefore, contractors are left struggling to pay their employees and suppliers, let alone make a profit.
With a Flexbase subscription, though, progress payments and automated invoicing can become your new normal.
Plus, our customers get paid 63% earlier, on average. Cross one construction cash flow problem off your list.
#2: Slow-Paying Customers
When polled in the Construction Cash Crunch Report, only 8 percent of construction businesses said that their customers always pay on time.
Unfortunately, slow-paying customers and payment delays are arguably the most common construction cash flow problem faced by construction companies.
When a payment isn’t made on time, it can have a domino effect on a company’s cash flow, including the inability to pay:
- Subcontractors; and
- Supplies and materials.
Slow paying customers can also wind up costing a construction business more as well since late fees and finance charges add up quickly.
#3: High Payroll Burden
When looking at a cash flow for construction project example, one aspect that often trips up contractors is the burden of high payroll.
Slow-paying customers could freeze up your cash reserves leaving you unable to pay your workers.
And not being able to pay your workers on time could cause a huge staffing issue for a construction company.
Because there is an abundance of opportunity for workers, they may look elsewhere if they aren’t getting paid on time.
#4: Slow Invoicing
The way a company bills (and the timing and frequency) could also be a cause of its negative cash flow.
Since contractors and subcontractors usually have multiple ongoing projects, not billing your clients in a timely and consistent manner can be a problem when you’re trying to maintain a consistent cash flow.
To combat a stall in your reserves, also avoid over or under billing your clients as it can cause unexpected issues with your cash flow.
You can better manage cash flow when you are submitting both accurate and timely invoices for your work.
Inconsistent billing coupled with payment delays will likely lead to negative cash flow in the long run if not addressed.
5: Using Cash To Pay For Assets
If you’re going to create positive cash flow in your business, the strategy will be centered around managing your working capital – aka cash.
When you use that working capital to buy equipment or materials, you are essentially wasting it.
It’s a much better approach to finance large purchases as it frees up your cash to cover other, more pressing daily costs (like payroll).
5 Solutions to Construction Cash Flow Problems
Because every project a construction company completes is unique, they operate differently from most businesses — which means improving cash flow requires some unique strategies and solutions.
Now that we’ve looked at five common construction cash flow problems, we can move on to the ways you can up your cash flow.
#1: Utilize Working Capital
Growing your business can be a bit of a double-edged sword.
Getting a project off the ground requires a lot of up-front cash paying for:
- Labor; or
- Additional workers.
What’s the key to solving the cash flow problem associated with growth? Utilize working capital.
- Securely access your financial statements
- Integrate with each of your bank accounts and business tools; and
- Analyze all the data before sharing it anonymously with our lenders.
Our automated platform is your solution to a broken system.
#2: Negotiate Payment Terms or Offer Discounts for Early Payment
In order to combat invoicing issues, you’ll want to be specific and intentional in your contract when it comes to:
- Payment terms
- Change orders
- Retainage; and
- Penalties for late payments.
If you’re not already, it’s a good idea to start including clauses for progress payments in your contracts.
Progress billing simply means that you invoice based on your progress on the job.
The amount you bill is generally related to the percentage of work you have completed.
For example: If you’re 15% done with the job, you would bill 15% of the contracted amount.
Alternately, you might choose to structure your progress payments based on certain project milestones, like completing floor installation.
The main benefit to progress billing is the speed. You don’t have to wait until the end of the job in order to invoice.
With progress, or AIA, billing, you’re able to have a steady flow of cash and eliminate one of your potential construction cash flow problems.
This consistent cash flow allows you to…
- Control budgets
- Pay laborers and subcontractors
- Purchase materials; and
- Manage other debts
…much more efficiently.
With your Flexbase subscription, you’re also able to:
- Negotiate payment terms with your customer
- Charge interest on late payments; and
- Incentivize on-time or early payments with discounts.
Unfortunately, just because you negotiate certain terms on your construction contract, that doesn’t always guarantee that a client will honor that schedule.
Even if all of your accounts are billed out but the invoices are still outstanding for 60-90 days, that’s a problem for your cash flow.
How can you alleviate this roadblock?
#3: Automate Your Invoices
If you’ve ever completed an invoice, you know how much of a headache the tedious task can be.
Unfortunately, invoices are an essential part of your cash flow.
It’s important that all of your client’s invoices be automated and sent as soon as possible.
If you’re looking to get ahead on your cash flow, you can also consider sending invoices ahead of time.
With a Flexbase subscription, you’re getting payment automation at your fingertips.
Generate payment apps with:
- Schedule of values
- Lien waivers
- Prevailing wage
- Insurance documents
- AIA forms
#4: Process Change Orders Quickly
One way to manage your construction project cash flow is to stay on top of your change orders.
Change orders are often the result of a project that requires more:
- Money; or
…than originally planned or budgeted for.
The benefit to processing a change order immediately (instead of waiting until the project is complete) is that your money can be received in a more timely fashion and positively impact your cash flow.
#5: Protect Your Right to File a Mechanics Lien
A construction, or “mechanic’s”, lien gives builders, contractors, and suppliers legal recourse to get paid for their work as well as any materials or supplies purchased for a project.
When a contractor files a lien, they gain a security interest in the home or property.
Let’s say, for example, you want to process a $200,000 invoice, but your client isn’t paying.
With the Flexbase payment reminder system, we’ll stay on top of your clients by sending payment reminders automatically over SMS and email to every contact you’ve listed for that client.
If there are any third-party contacts involved, like an architect, they would also be included.
Our system will send all contacts a reminder every few days.
But what happens when you’ve sent out three reminders and still, no payment has been made?
With your approval, we will send a certified mail letter with the intent to file a lien. If they still don’t pay, we move to file a lien.
Once that is filed and you’re on that real estate title as a lien, you’ll be the first to get paid if that real estate asset gets sold or another party comes on board.
Why Is Cash Flow So Difficult?
Cash flow in construction can be difficult to maintain due to a number of factors, including:
- Labor-intensive work
- Overstock of inventory
- Unfavorable legal settlements
- Cash used for outside investments
- Cash advances or loans to officers or employees
- Cash purchases of fixed assets
Add in payment issues such as…
- Internal time lags between end of period date and submittal of requisition
- Payments made to suppliers or subcontractors before receiving cash payment from the related project
- Time lags between billing and collection (aka slow payers)
…and you’ve got a handful of issues that make maintaining positive cash flow a difficult job.
How Flexbase Can Help Solve Your Construction Cash Flow Problems?
Whether your experience cash flow struggles due to slow-paying customers, lack of capital, or a high payroll burden, Flexbase is the answer.
Thanks to the Flexbase payment reminder system, we’re able to stay on top of your clients by sending payment reminders to every contact you’ve listed on the project, including…
- The developer
- Their accounting team
- The general contractor
…along with any third-party contacts involved in the project.
Our system will automatically send all contacts a reminder every few days.
Plus, since we already have access to all of your construction company’s payment data, we’re able to pass all of the relevant information that a lender would need or want to know.
This often includes:
- Who your clients are
- Past AIA billing forms; and
- Your current and past projects.
By relaying this information to our preferred lenders, they’re able to have a higher quality, more comprehensive amount of data on your company from the get-go.
So, when you log into the Flexbase platform, you’ll be greeted with several different lending options that you have prequalified for.
Forget filing mountains of paperwork to apply for funding and then waiting weeks to get an answer from lenders. With our system, you can see your approval status in just 24 hours.
Don’t let the stress of your construction cash flow problems make you feel defeated— Flexbase can help.
Our automated payment software integrates with your current accounting and project management software for a streamlined and flawless payment process every time.
Get paid sooner with Flexbase and say hello to being cash flow positive.