Cashflow is often a make-or-break issue in the construction industry. Unlike many other sectors, construction projects typically involve large upfront costs and staggered payments, which can cause serious cashflow bottlenecks if not managed carefully. However, with a few practical strategies, you can take control of your project finances and keep cash flowing smoothly.
Whether you’re a sole trader managing small renovations or a mid-sized company handling bigger builds, here’s how you can stay ahead of cashflow issues while maintaining strong, predictable financial health.
Understanding the cashflow challenges in construction
Managing cashflow in construction is particularly tricky because of the nature of the work. The sector relies heavily on contracts, where payments often come in stages – typically at the completion of various milestones. This can create gaps between when you need to pay suppliers, subcontractors, or staff and when your business receives payments from clients.
For example, it’s common to be stuck waiting for a large payment, while at the same time, suppliers are knocking on the door demanding their money. This sort of cashflow imbalance can slow down projects, damage relationships with suppliers, and ultimately impact your profitability.
But there’s good news. With a few key strategies, it’s entirely possible to minimise these cashflow challenges and ensure your construction projects are financially sustainable.
Tip 1: Prioritise accurate project costing
One of the most common reasons cashflow gets tight in construction is underestimating project costs. You’ll need to be diligent in your project costing to avoid nasty surprises later.
Accurate project estimates should cover all foreseeable costs – including materials, labour, equipment hire, site utilities, and waste disposal. It’s also wise to factor in contingencies for any unexpected costs, which are almost inevitable in the construction world.
Tools like estimating software can help you get more accurate figures, but experience and on-the-ground knowledge are invaluable too. Make sure your quotes are realistic, so you’re not constantly scrambling to cover unexpected costs midway through a project.
Tip 2: Stick to tight payment terms
When it comes to payment terms, flexibility can backfire. It’s essential to set clear, firm payment terms from the outset and stick to them. Construction projects can take months to complete, so delayed payments can easily throw your cashflow off course.
Ideally, your payment schedule should be phased, with a percentage upfront, regular instalments tied to specific milestones, and a final balance on completion. Ensure clients are aware of these terms and that you stay on top of invoicing – chasing late payments when necessary.
In the UK, the Late Payment of Commercial Debts (Interest) Act gives businesses the right to charge interest on overdue invoices, so don’t be afraid to use this leverage if needed. Cashflow is king, and timely payments are the backbone of a healthy financial position.
Tip 3: Monitor your outgoings
It’s easy to lose track of small, regular expenses, but over time, they can snowball into bigger financial headaches. Whether it’s materials, equipment hire, or site costs, you should monitor your outgoings closely throughout each project. Keep an eye on how much is leaving your accounts and adjust where needed.
There are plenty of online tools that can make this easier by automatically tracking business expenses and providing you with real-time insights into your cashflow. This allows you to spot early signs of potential issues, making it easier to avoid shortfalls down the line.
Tip 4: Use financing options where necessary
Sometimes, a temporary cashflow issue is unavoidable, particularly on larger projects or when dealing with slow-paying clients. In these cases, it’s worth considering short-term financing options, like business overdrafts or invoice financing.
Invoice financing is a popular choice for construction businesses. It allows you to borrow money against unpaid invoices, bridging the gap between project stages without disrupting your cashflow. It’s a handy way to ensure you can meet your obligations to suppliers and subcontractors without waiting for client payments to come through.
Just be sure to weigh up the costs of borrowing against the benefits. Interest and fees can eat into your profits if not managed carefully, so always approach financing options with a clear understanding of the terms.
Tip 5: Keep your profit margins realistic
While it’s tempting to undercut competitors, cutting prices too much can erode your profit margins and leave you struggling to manage cashflow. Always ensure your quotes include a healthy profit margin that accounts for the real cost of doing business.
If your margins are too tight, even a slight delay in payment or a rise in material costs can cause serious issues. By ensuring you’re making enough profit on each job, you’re better positioned to ride out any cashflow bumps.
Tip 6: Build strong relationships with suppliers
Your suppliers are essential to keeping projects on track, so it’s worth investing time in building strong relationships with them. By maintaining open communication, negotiating better terms, and paying them on time, you’ll foster goodwill that can be incredibly valuable during busy periods.
Suppliers who trust you are more likely to offer flexible payment terms or even help you out with urgent materials. On top of that, a good relationship can give you more room to negotiate better prices, which directly impacts your cashflow in a positive way.
Tip 7: Consider using retentions carefully
Retentions – withholding a percentage of payment until after project completion – are common in construction. While they offer protection in case of defects or unfinished work, they can also restrict cashflow if too much money is tied up for too long.
The standard rate for retentions is around 5% to 10%, but negotiating lower retention percentages, or phasing retention payments, can ease the cashflow pressure. Also, be mindful of clients withholding retentions for longer than necessary. Always have a clear plan for releasing these funds once the work is satisfactorily completed.
Conclusion: Take control of your cashflow
Effective cashflow management in construction comes down to a combination of accurate project costing, setting clear payment terms, and keeping a close eye on outgoings. When issues do arise, having the right financing options and supplier relationships can make all the difference.
By following these tips, you can keep cash flowing smoothly throughout your projects, ensuring you stay profitable and able to take on new work without unnecessary financial stress.
And if you need any assistance managing your project finances, we’re always here to help!
Get in touch with us today.
