{"id":100372,"date":"2017-03-07T06:13:59","date_gmt":"2017-03-07T11:13:59","guid":{"rendered":"https:\/\/sjcivil.com\/?p=100372"},"modified":"2024-03-27T06:07:16","modified_gmt":"2024-03-27T10:07:16","slug":"contractors-cash-flow-acknowledgement-improvement","status":"publish","type":"post","link":"https:\/\/sjcivil.com\/contractors-cash-flow-acknowledgement-improvement\/","title":{"rendered":"A Contractor\u2019s Cash Flow: Acknowledgement and Improvement"},"content":{"rendered":"<p><strong>Executive Summary:\u00a0<\/strong>\u00a0Managing cash flow is imperative and it never hurts to see these challenges on paper.\u00a0 This article reminds you as the owner, the chief financial officer, or as a member of the project management team of the challenge of staying cash positive.<\/p>\n<p><strong>Cash is king.\u00a0\u00a0<\/strong>If you\u2019ve had a career with a large cash-rich company, you may not be familiar with this phrase. \u00a0If you had your own business or worked in a smaller company, keeping a positive cash balance in the bank can feel like having your shoulders and chest in a body-sized vice for most of every month.\u00a0 Here\u2019s a possible monthly cash flow diagram for a 10-month long job with a $1,000,000 contract value:<\/p>\n<p>There is practically an infinite number of variables in a project affecting cash flow.\u00a0 If you made your own cash flow chart like mine above, it would certainly look different.\u00a0 Here is a brief description of the variables and calculations of values used in the above cash flow graphic:<\/p>\n<ul>\n<li><u>Insurance<\/u>\u00a0\u2013 insurance is paid in advance for the company, one year at a time. So, if you renew your policy(ies) today, the annual payment is due today.\u00a0 You can pay it incrementally, but only to the entity who financed your upfront lump sum payment to the carrier.\u00a0 The chart assumes this company owes a $100,000 payment today (six months ahead of the project start date) and does $15,000,000 worth of work. I included 1\/15<sup>th<\/sup>\u00a0of this $100,000 premium.<\/li>\n<li><u>Bond<\/u>\u00a0\u2013 when you get the contract from the owner, the first call you will make is to your surety agent to get the performance and payment bonds coming. The bonds come right away and so does the invoice.\u00a0 The value of the bond was slightly over 1% of the $1,000,000 contract value.<\/li>\n<li><u>Labor<\/u>\u00a0\u2013 labor wages are due weekly to employees, weekly to the government for taxes, and monthly for union dues. I assumed 35% of project cost was labor.<\/li>\n<li><u>A\/P (accounts payable) &amp; other<\/u>\u00a0\u2013 vendors (accounts payable) expect to get paid anywhere from today to 45 days out. The chart assumes 20% of the contract is accounts payable.<\/li>\n<li><u>Fuel<\/u>\u00a0\u2013 fuel is expected by many vendors to be a weekly payment and some fuel suppliers will only provide fuel if they can make an automatic weekly deduction from your bank account. Total fuel value of $35,000 was used in this calculation.<\/li>\n<li><u>Subcontractors<\/u>\u00a0\u2013 this should be a cash neutral expenditure. Your subcontracts should read pay when paid.\u00a0 We used $350,000 as our subcontractor cost value.<\/li>\n<\/ul>\n<p>Regarding income, it is a much cleaner schedule with less variables:<\/p>\n<ul>\n<li><u>Progress payment<\/u>\u00a0\u2013 the first payment request is generated on day thirty (30) of the project and is received forty-five (45) days after your request \u2013 this equates to you having to cash flow labor, for example, for approximately seventy-five (75) days. This pattern of Net 75 continues for the duration of the project.<\/li>\n<li><u>Retention<\/u>\u00a0\u2013 notice that 100% of our fee is in the retention. We don\u2019t receive this final 5% payment until after all closeout paperwork is completed.<\/li>\n<\/ul>\n<p>Here are some takeaways and other observations from the graph:<\/p>\n<ul>\n<li><u>Zero line<\/u>\u00a0\u2013 this is the cash neutral line (neither cash positive, nor cash negative).\u00a0 Ideally, we want the cash flow (fuchsia dashed line) to be positive which is above the zero line.\u00a0 Notice on our project, we weren\u2019t cash neutral\u00a0<em>until two months after the project was complete.<\/em><\/li>\n<li><u>Cost of money<\/u>\u00a0\u2013 if you have to tap your line of credit, this should be an expense to the owner; even if you don\u2019t tap your line of credit, you\u2019re using your own funds and the owner should pay for that too. Consider adding a line item in your bid for cost of money.\u00a0 This graph should clearly depict that a lot of contractors finance work.<\/li>\n<\/ul>\n<p><strong>My story.<\/strong>\u00a0My story is no different than anyone else\u2019s story in regards to trying to get to\u00a0or stay cash positive.\u00a0 I always tried hard to:<\/p>\n<ul>\n<li><u>Bill aggressively<\/u>\u00a0\u2013 as you can see from the graph above, it is quite possible that your project will be in a negative cash position for a large portion or certainly over half its lifespan. Try to:\n<ul>\n<li>Bill into the future \u2013 if you are generating a bill on the 20<sup>th<\/sup>\u00a0for work through the 30<sup>th<\/sup>, assume sunny skies and great productions<\/li>\n<li>Ask to \u201coverbill\u201d items to offset change orders \u2013 if that $50,000 change order isn\u2019t coming through on this pay application, ask to overbill a contract item to compensate for the owner\u2019s lack of payment on the change order work performed this pay period, but not being paid<\/li>\n<\/ul>\n<\/li>\n<li><u>Bill timely<\/u>\u00a0\u2013 hand an invoice to your client when (s)he wants it; if it\u2019s due on the 30<sup>th<\/sup>, get it there by noon on the 30<sup>th<\/sup>\u00a0at the latest.<\/li>\n<li><u>Bill clearly<\/u>\u00a0\u2013 an invoice which is easy-to-read and complete with information that the owner requires (invoices, receipts, tax clearances, notary acknowledgments, etc.), you will get paid more quickly<\/li>\n<\/ul>\n<p>I enjoyed positive cash flows as much as 20% of the contract value over half the project on the good jobs.\u00a0 Bill your change orders timely and stop complaining about the hassle of all the paperwork.\u00a0 He with the gold makes the rules (that\u2019s not you), and if your client (the person with the gold) wants all of these bells and whistles, provide them so you can get paid!<\/p>\n<span class=\"et_bloom_bottom_trigger\"><\/span>","protected":false},"excerpt":{"rendered":"<p>Executive Summary:\u00a0\u00a0Managing cash flow is imperative and it never hurts to see these challenges on paper.\u00a0 This article reminds you as the owner, the chief financial officer, or as a member of the project management team of the challenge of staying cash positive. Cash is king.\u00a0\u00a0If you\u2019ve had a career with a large cash-rich company, [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":104518,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","iawp_total_views":25,"footnotes":""},"categories":[50,38],"tags":[142],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>A Contractor\u2019s Cash Flow: Acknowledgement and Improvement<\/title>\n<meta name=\"description\" content=\"This post reminds you as the owner, the chief financial officer, or as a member of the project management team of the challenge of staying...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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