Construction companies find themselves in a strange cash flow limbo. A company may have a $500,000 contract to build a home—but that doesn’t mean they have $500,000 on hand now to pay for materials and employees. Payment comes in stages—or not until much later—after materials are ordered or subcontractors are paid.
This creates a significant cash flow problem that even seasoned veterans of the industry fall prey to. You have materials to buy today. You have to pay the electrical crew this coming week. But your client won’t approve the next draw for another three weeks. However, in the meantime, your bank account is flipping upside down.
The Timing Problem of Payment
This is what cash flow looks like for many construction jobs. As a general contractor, you win a bid. Materials need to be ordered immediately so that the build can get off on the right foot (lumber, drywall, HVAC, roofing, etc.). Those vendors want payments within 30 days, if not sooner.
Then you have your subcontractors—electricians, plumbers, framers—all requiring payment on time (meaning within a week or two of finishing their work). They also have bills, so they cannot wait until your client decides to release funds to pay the crews.
Your clients, on the other hand, plan to pay at stages (or at punch lists)—25% upfront, 25% upon framing, 25% when closed in, and 25% upon inspection (for certain projects). The gap between each stage may take one week to several weeks or months, depending on the scale of the work.
How Successful Construction Companies Manage In Between
Thus, companies that succeed understand a few ways to mitigate these gaps in timing.
Negotiating Better Terms With Vendors
Savvy contractors learn to negotiate relationships over time. They get net-60 or net-90 to pay for materials—and during that time, they’ll have paid a crew and will be onto the next round of payment (for materials or installation).
But they only get these terms from companies who trust them. Therefore, paying on time and consistently ordering materials takes time and tenure with a specific construction company. New ones may not have this option immediately.
Lines of Credit
Thus, many successful construction companies create business lines of credit with these timing gaps in mind. It’s a safety net with which they can fall back on when expenses come before revenue. The credit only kicks in when actually used, and they pay interest on what’s drawn.
However, traditional lines of credit come with a catch; financial statements, tax returns and other metrics may restrict what new construction companies are given regardless of their needs for bigger jobs.
Business Credit Cards
Recently, more and more construction companies value high limit business credit cards as legitimate ways to access materials and issue payments before customers get around to paying on their end.
What’s important here is high limit; business credit cards may only allow for $10,000-$25,000—but many contractors require $50,000 for materials for one job (or many crews simultaneously).
Therefore, cards that target those companies that need higher spending capabilities allow everyone to order now and pay later by using vendor purchases as collateral. Often the timeframe for payment is 30-45 days after purchase—and given the natural way construction projects flow, payment only needs to be rendered after clients give the ok.
Managing Multiple Jobs
Thus, if a contractor has multiple projects going at once—and they often do—they now have compounded spending going on where payments are from multiple sources simultaneously.
Some construction companies keep their projects separate; they know how much they’ve spent so far on the Henderson renovation versus the new build downtown. They do this to separate client costs as some projects may still be in get-off-the-ground stages while others get them back money owed.
Virtual or digital payment options enable managers to do this better; instead of using one card for everything, project heads may get specific cards with specific spending limits so that someone in the main office can see what’s been purchased right away without waiting for receipts and expense reports.
Subcontractors
Sometimes subs are another line item that is hard to manage with cash flow. They too have bills; they work for other people as well and expect timely payments. If you develop a reputation for paying late because you’re waiting on your customer to pay you first, good subs will avoid working on your sites.
Successful construction companies have non-negotiable payment terms for their subs—even if the customer is late; they ensure subs get paid on time because they can afford them without having accessibility to payments owed.
Access to Adequate Credit
Without access to adequate credit as well as reputable good faith with subcontractors, there’s rarely a good working relationship that keeps jobs efficient.
Planning for Delays
Few if any construction jobs go according to plan. Something gets held up—materials run late—weather delays shift timelines—inspections turn up options that weren’t discussed before—but these end up costing clients more than what was supposed to happen.
Successful operators know this happens and maintain compensation before depleting all accessible credit. They keep credit available beyond day one purchases right away so they’re not running on fumes before they’re expected.
Emergency Funds
Some keep emergency funds on hand as accessible cash flow either as allowable credit or savings that shouldn’t be accessed until absolutely necessary due to unforeseen expenses.
The bottom line is using it as insurance against financial failure.
What Works Long-Term?
Ultimately there are trends construction companies learn from those who never face cash flow issues again. They invoice clients immediately when milestones are complete—they stay on top of accounts receivable more quickly than overdue payments—they keep multiple funding options so they’re not relying upon just one.
And they get comfortable knowing cash flow options will always exist at some time; they can’t eliminate the gaps and timing—they’re in an industry where that’s just how it goes.
Instead, successful companies find ways to protect their stress levels and vendor relationships while managing a conundrum that ultimately other industries don’t frequently experience.
The difference between unsuccessful construction companies and those that flourish is better problem solving within the payment timing puzzle—it’s not always about having excess cash/credit—it’s about bridging the gaps naturally created by doing construction work in the first place.