The COVID-19 pandemic has affected the construction industry as we know it, especially regarding issues with cash flow.
A recent study shows that just 1 in 10 construction companies are always paid in full for construction jobs, which is a staggering 75% drop from before the pandemic.
We interviewed three construction companies to get a bird’s eye view of the types of successes and failures companies are experiencing with cash flow. Here’s what we found:
“The last two years have placed unusual demands on contractors and the cash flow needed to operate at a high level. The normal process of completing projects in a timely manner and receiving the payments are increasingly complex.” Shares Donald Bloom, President of Myriad Electrical Contractors.
“The delays in construction due to sickness, material shortage, and other supply chain difficulties make it harder to complete and collect. At the same time, the demands of vendors, suppliers, and other trades are being pressured. Most people are using the high demand for services to collect earlier or not provide services.”
Many construction companies are feeling the same pressures, as gross margins that typically build up cash flow are reducing. The time it takes to get paid is increasing while the time to pay others is shrinking.
This problem has caused Myriad Electrical Contractors to select clients on a more strategic level, “The cash flow part of the project is now one of the decision factors to bid a project.”, says Bloom
As far as failures and successes with cash flow, Bloom shared the following:
“One failure during this period of cash flow demands is not staying on top of collections. We did not invoice as the project progressed and no one was responsible for making sure each and every payment is received in a timely manner. Now, this is reviewed weekly to determine how to get paid properly. One success is to not sign contracts without this information. We now request better terms before signing contracts. Our revenue may decrease but cash flow is now being measured.”
Cash flow is an issue that is on the minds of every contractor in the construction industry.
“Cash flow is something, as a business owner in construction, I worry about daily. When we have customers we are building custom homes for, people tend to think that's so great because the customer or bank pays for everything upfront before we begin a certain phase of the project but that isn't always the case.” Trapper Roderick, owner of Roderick Builders shares.
Often in these situations, payment from the bank is delayed or certain decisions need to be made immediately to avoid an increase in expenses. Roderick shares his solution to this problem, “We will often front the cash for our customers to get them a better deal with supplies or subcontractors. This is a part of the business that can make or break a job that our customers will rarely see.”
Like nearly every construction company, negative experiences related to cash flow can occur. Roderick recalls one of his own experiences,
“One negative experience I have had with cash flow is on a recent project we wanted to impress the investor for the project. So, we kept paying for things to keep moving rather than being the negative hardball guy that says ‘I'm not continuing till you pay upfront.’ I thought, why would we worry? They have always paid us up till this point for the last year. They are just a little behind. This went on for over two months for a pretty large custom spec home. Well, now we know the bank is no longer willing to lend more money on the project, for the time being, we will either end up eating this or waiting for the project to pick back up.”
This is a scenario that is all-too-common in the construction industry.
The question is, how do you bounce back from a situation like this?
“Making sure we are on top of billing regularly ensures we have a healthy business.” Roderick says, “Since we have been able to cash flow many materials for our jobs, oftentimes ahead of when we are reimbursed for them, we have been able to save a lot of money.”
And while Covid-19 was a devastating blow to many construction businesses, thinking ahead of the game seems to have played a key role in the cash flow success for Roderick Builders,
“Last year, because of all the crazy supply chain issues with Covid, we saw the writing on the wall and we preordered a ton of material six months before we would even need to use it. We ended up being right on our original budget, whereas, if we would have ordered it within the normal timeline not only would we not have been able to get this material for a month, we also would have paid triple the price.”
Issues with cash flow seem to boil down to one, main principle: time.
Whitney Hill, from SnapADU shares their struggle with cash flow, “One factor that caused difficulties for us cashflow-wise as a design/build firm is that we have faced extremely long permitting timelines.” Hill continued, “We make most of our money on the buildout, so when projects linger in design and permitting, we are still supporting that staff overhead but not yet making money on the build.”
Through strategic decision-making, SnapADU was able to find a solution to time sensitivity with their permitting timelines, “We have addressed this by bringing permitting in-house to reduce our turnaround times, which is good for us and the client.”
In addition to permitting timelines, struggling to pay vendors on time is also a common cash flow issue these days. SnapADU was able to find a solution that works for their business, “One big factor in helping our cash flow situation, in 2021, was developing partnerships with larger supply houses that offer Net 30 terms. This allows us to receive the material, install, bill the client, and then pay our vendor shortly thereafter.”
The COVID-19 pandemic has created a lasting impact on the construction business. Without knowing when COVID-19 will cease to have an impact on the world, it is safe to say that construction cash flow problems are likely to persist.
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