by John Chaney
[Editor's note: The following blog post originally appeared on DexterChaney.com. It is the second in a series from Dexter + Chaney co-founder John Chaney, sharing his insights on business and the construction industry at Construction Dive. To get caught up, read Part 1 of "Negotiating the cash flow minefield."]
Previously, we discussed how construction project estimates and the way in which cash flows in and out of a job affect a contractor’s ability to manage cash flow. Today we’ll discuss two more minefields that contribute to construction cash flow’s volatility.
Multi-tasking
It’s typical for construction companies to be working multiple jobs at multiple sites managed by separate project managers. This is a good thing, except sometimes when cash starts crossing lines. A story I’ve heard too often goes a little like this: Job A seems to be under-budget and ahead of schedule. Job B is in trouble and needs funding, so back at the office cash is moved from A to B. Well, it turns out that although Job A was at the halfway point on the timeline and was under 50% on projected cost, the actual work completed put the job at an effective 25% complete. In reality, not only was it behind schedule, it was over budget, and not a good candidate to fund shortfalls on another at-risk project.
No DIY
Remodeling a bathroom is a good do-it-yourself (DIY) project (for the brave). Constructing a building or infrastructure is rarely if ever a one-company affair. Contractors are at the financial mercy of subcontractors and vice-versa, and both depend on constant supply and predictable pricing from vendors. In short, construction is a team sport and if one player drops the “cash ball,” everyone loses. Default on a big project ripples through the general ledgers of every company, supplier, and owner involved. Poor performance by one tradesman can affect the entire timeline and therefore cash pipeline of a job.
It may seem that negotiating a path to profit through this cash flow minefield is nearly impossible. The good news is that there are proven paths through the difficulties. Stay tuned as we continue the cash flow conversation.
How you manage cash flow in your office?
John Chaney, CPA/MBA, co-founded Dexter + Chaney with Mark Dexter in 1981 after working together at the Seattle office of Arthur Andersen & Co. They decided to form their own company after determining there was a market need for construction management software for construction companies with $1 million or more in annual sales.
John is an active member of the Construction Financial Management Association's Puget Sound chapter and is a former member of the chapter's board of directors and a former chairman of its Academic Scholarship Committee. John is an industry leader in the design of construction management software, and is a frequent contributor to major industry magazines. He earned his Masters of Business Administration from University of Washington and his Bachelor of Science from University of the Pacific.
