The author discusses the importance of improving financial management to survive in a tighter market.
As the market tightens, many contractors find themselves reflecting on the dynamics of the boom. When demand was at its peak, many hired labor at inflated wages just to get bodies. When concrete and steel prices soared, there was no room for negotiation they paid the prices because materials were essential. Subcontractors could command any price, and GC’s paid them.
It seemed like it would never end. Growth was swift and the money rolled in, with more jobs, bigger projects and higher bids. Small businesses were suddenly big operations. There was more equipment to buy or lease; more employees to find, manage, and pay; more materials to source, price and procure; more jobs to bid, track, bill and collect.
Some firms grew so fast that things got a little out of control. But who had the time to think about improving management systems or procedures?
Now the big developers have put projects on hold. Contractors are left holding agreements they’ve prepared for with equipment, labor and even materials, for projects that may never come to fruition. Many are experiencing cash-flow problems. To survive as the market tightens, contractors must improve their financial management skills.
How’s your cash flow?
Billing and collections can be key to survival when times are tough. How much do you have in unbilled work-in-progress? Are you ahead or behind in cash? Simple reports can help you see where cash flow can be improved; tightening billing and collection procedures can make a difference.
Do you understand your costs?
Most contractors lack the job costing information they need to manage. Each job should begin with a budget, with cost codes and sub-codes for time and materials. As you complete the project, compare budget to actual costs. Where are you exceeding your budget? Where are actuals lower than you projected? In a more competitive environment, understanding job costs improves bidding effectiveness. There’s little point in winning a job if you’ve priced it below your true costs.
Do jobs change from estimate to project management?
Estimates are broken into phases. Your budget is based on those phases. To compare actuals to budget accurately, track costs in the same phases. All too often there’s poor communication between project manager and estimator. Too frequently, their systems aren’t integrated: estimator’s phases and project manager’s phases are out of sync. This is a common reason why contractors are unable to manage their costs.
How do you manage change orders?
Change in a project means change in the costs, so you’ll need to bill and collect for additional expenses. Yet many sub-contractors fail to get approval on change orders from the prime. Many general contractors fail to get approval from the developer. Addressing changes in a timely manner and instituting solid approval procedures can improve the odds of getting paid, ultimately improving your financial performance.
Do you have the right accounting system and procedures?
As you grew more successful you probably saw the need for systems to improve efficiency and to solve a variety of problems, or capture new opportunities. You may have chosen to add estimating, scheduling, project management or equipment management systems to keep things under control.
In most cases, these packages were purchased at different times, and often not from the same software company. They’re not integrated. This patchwork of data doesn’t provide the reporting you need to understand and improve your business performance.
It seems like a tough time for an investment, but you may find that a new system pays off rapidly by improving your cash flow, increasing your ability to collect on change orders, and helping you bid more effectively. To find the right system for your business:
- Don’t mix and match your systems won’t talk to each other.
- Don’t be cheap. True construction accounting packages can save you money in ways you’d never imagine.
- Ask someone who knows your business. Someone with broad industry experience, like your accountant, will know which packages work for companies of your size and profile.
Though it’s difficult to predict the long-term effects of this changing environment, a decision to improve the financial management of your company is a sound step for survival and continued prosperity, far into the future.