12 Financial Strategies for Construction Contractors
A successful contractor does everything possible to run a lean, financially sound company. Finding ways to save money while increasing margins, improving cash flow and operating more efficiently is key. Following are 12 financial strategies contractors can implement to stay financially healthy.
1. CHANGE PAYMENT TERMS
Establish a payment schedule based on the project’s percentage of completion. Be sure to include clauses in contracts that require the client to meet readily identifiable milestones tied to the payment terms.
2. BILL AHEAD OF COSTS
Avoid using company funds or a line of credit to fund an entire project. One method used to accomplish this is to ensure that contracts are front loaded to receive higher payments earlier. This way the client is taking on more of the financial risk instead of the contractor.
3. GIVE A DISCOUNT FOR PAYING WITHIN 30 DAYS
Encourage clients to pay faster by offering an incentive. Make the percentage discount high enough to entice clients to take advantage of this opportunity to save money. Build the discount into the project fee to absorb the cost.
4. CHARGE INTEREST ON LATE PAYMENTS
Charge a high enough rate to make clients pay attention. Avoid waiving interest charges unless it is absolutely necessary to maintain the relationship with the client.
5. CONSIDER LEASING OR FINANCING NEW EQUIPMENT
Cash and working capital are the lifeblood of a business. Leasing and/or financing provide excellent tax incentives to retain working capital and spread the cost out over the years that the equipment is generating income.
6. MANAGE MATERIAL COSTS
Although there is little a contractor can do about the rising cost of construction materials, there are ways to manage the impact on the jobsite. Minimizing procurement or purchase costs is important to controlling costs. Decide on the timing of material purchases during the job estimate, initial planning and scheduling stages of construction.
7. PLAN FOR THE TIMELY DELIVERY OF MATERIALS
If materials are purchased too early, capital may be tied up and interest charges incurred on the excess inventory. Additional expenses may be incurred if materials are delivered too early and must be put into storage or if orders that are placed too late have to be expedited. Using a materials requirement and management system can help project managers meet purchasing requirements.
8. MANAGE PRODUCTIVITY
Controlling labor activity at jobsites is a concern for contractors. Labor productivity can be measured as functional units per labor hour for each type of construction task. Specific tasks can be monitored using either higher-level or lower-level measures. Miles of highway paved per hour is an example of a higher-level measure and cubic yards of concrete placed per hour is a lower-level example. Individual activities are easier to monitor using lower-level measures, while higher-level measures may be better for comparing overall performance against industry standards.
9. TRACK PRODUCTIVITY TRENDS OVER TIME
Month-over-month and year-over-year production statistics should be analyzed, especially when labor and material costs are on the rise. Contractors should also benchmark their performance against industry standards to ensure that job costs are in alignment with the competition. Study regional and national data, as well as indices compiled by creditable sources on performance by craft, project size, type, location and other major project influences.
10. USE RETAINAGE FUNDS TO YOUR ADVANTAGE
Many banks are now allowing retainage to be used to assist with financing needs. Review the available options and negotiate better terms.
11. DISCUSS LOAN COVENANTS
Avoid having an issue with banks if the terms of covenants on commercial loans or bonds issued cannot be met. Look to rectify the situation before it becomes a problem. Bankers are more likely to continue to work with contractors who present a viable plan and realistic solution. Taking action may help to avoid funding interruptions.
12. ASSESS YOUR TAX ELECTIONS
Contractors who have proactive CPAs with in-depth knowledge of the construction industry benefit from many tax elections that can help improve cash flow. If numerous elections are not assessed, there is a good chance that too much cash is being spent.
The above financial strategies should provide guidance on how construction contractors can save money, improve cash flow and operate more efficiently. Contractors should consult with their team of advisors on which strategies are best to implement, as well as potential consequences.