Construction cash flow management is crucial for both the contracting and consulting sides of the construction business. Every construction business needs cash to pay for their employee expenses, source construction materials, and support the proper management of their projects.
To ensure proper construction cash flow management, the following strategies can be adopted:
- For a contractor, during the tendering stage, there is a need to do proper due diligence and background checks on the client they are about to get engaged with to learn about their payment history and whether they honour payments on time. This is important as there are clients who have issues not responding to contractor requests for payment, and this will hurt the cash flow of the contractor.
- Payment applications should be done within the contractual schedules. As a contractor, ensure that you negotiate payment schedules that match your cash flow requirements and initiate the payment processes early on to allow enough time for processing. A monthly contractual payment schedule would suffice because most expenses and bills are recurring every month.
- Also, project quantity surveyors should ensure they accurately verify the value of work done, materials on site, and any change orders to ensure they do not recommend an overpayment or underpayment to the contractor. An overpayment will hurt the client side, while an underpayment would mean the contractor may have less money to invest in the subsequent stages of the project or to repay any financing they may have secured at the onset of the project.
- Proper quality control on site is needed, especially by the contractor’s construction management team, to ensure no defective or abortive works on site. This will eliminate waste and instances of rework. The consultants won’t recommend payment for any defective works, meaning those reworks will eat into the contractor’s profits and may lead to a time overrun that comes with an extra cost as a result of the prolonged site preliminaries.
- At the pre-tender stage, proper construction cash flow forecasting is essential to give a clear picture of the expectations of cash inflows for the contractor or cash outflows for the employer. This will influence most of the decisions made on the allocation of resources, labour, plant, and equipment to maximise their productive time for maximum productivity gains.
- Disputes must be avoided by all means, and when they arise, they must be dealt with promptly to avoid further escalations. The court processes for resolving these disputes are high and will make the project expensive for all parties. By practising dispute avoidance and prompt resolution of issues, the project team will be saving themselves time and unnecessary costs, hence protecting their cash flows from being hurt.
