" We were always focused on our income statement. But cash flow was not a regular topic of discussion. It was as if we were driving and looking only at the speedometer, when we actually fell out of gas ." ̵1; Michael Dell, Founder and CEO of Dell Technologies
It takes a broad skill to run a successful construction business and navigate the essential risks in the industry. Not only do you need to know the efforts of construction, you also need to be skilled in management and finance. From implementing contracts to understanding the bidding process to managing resources, not least is cash. The quotation above from Michael Dell on cash flow is very current and applies to entrepreneurs. A large citizen company recently listed its "Top 10 Reasons Entrepreneurs Risk to Fail", with insufficient cash flow as # 4 on the list. Cash flow issues have historically been at the top of similar lists of construction industry risks. The ability to quickly access cash is the universal resource to address almost every problem that arises.
Cash flow management is like managing a contest – knowing where the checkered flag is, who is on your pit staff, when to make the pit stop and the fuel is available when you enter the pit are all critical elements that must fall on place to win the race. When you look at your cash flow, you need to know when it comes in and from where you can optimize production and maximize your business performance. With cash flow forecasts, you can tell when you need to burn up (start building cash or borrow) and when you press the figure pedal on the metal. When it comes to car racing, good drivers pay attention to these objects and do well over time and winning several competitions a year. Good drivers look closer and fine-tune the engine to get the best performance so they can win the Cup Series. For a construction company, the engine is the contract they perform and in particular the clauses that they include or discontinue. By fine-tuning contract terms and having the discipline of not accepting negative conditions, entrepreneurs can gain access to the money needed to succeed.
By reviewing construction contracts over the past thirty-five years, I have helped identify some of the more problematic clauses that may arise in a contract for subcontracting. Here is a cash flow checklist for entrepreneurs that I ran early in my career, which with a small tweaking still applies today and points out critical contract details that affect cash flow.
It is important to review contracts in their entirety – the plans and specifications as well as the general and special or supplementary conditions. While it is important to focus on what is being built – confirming that there are complete plans or events for unclear design is the key to a profitable project. However, the general / special / supplementary conditions contain contract terms that control the cash flow on the project: When invoices are paid, when they are paid, how much detention will be held, and so on. Although the review of the contract terms seems obvious, I have seen retention clauses with 55% holdings that no one noted until late in the bidding process. It ended up being a type error corrected by an RFI.
Something that is often overlooked, but may be critical, is downstream regulations . Contract terms specify the terms of upstream agreements in your contract by reference. While they are usually seen in subcontractors, they are sometimes seen in the ownership agreement – especially on P3 or building / leasing projects. These provisions can be subtle and easy to miss. Part of the problem is that there is no standard language or space for these clauses. Flow regulations may occur in the preamble of the agreement, which is included in the work area or buried in the definition of a contract. Regardless of where they are located, they may contain conditions that can materially affect the contract's risk and cash flow. Unfortunately, injuries are often one of the most important provisions that flow down. Finding an uncapped $ 50,000 per day LD clause after signing a $ 250,000 contract is a real problem.
Sometimes it is a reconciliation clause that is included in the contract, but upstream of the contract is not provided or is highly editorial. Be sure to specify your bid or proposal for full access to the upstream contract (and any subsequent change orders or additions) and / or limit the liability to these provisions to an acceptable amount. Remember that an entrepreneur's best contract may be the one from which it goes.
The construction is a really hard business – the contractor works with dozens of subcontractors, subcontractors, suppliers, workers and the code that handles inspectors to build a project based on an architect or engineer's interpretation of what an owner wants and to deliver when they want it. In construction, it is not about if something will go wrong, but rather a question of when. When you hit that bump on the road, make sure you have a lot of gas (cash flow) to push it through.