With pandemic assistance coming to an end — such as the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERC credit) — that boosted cash flow for many construction companies since 2020, cash management strategies need to be revisited and refreshed to ensure your company takes the right steps to improve liquidity and strengthen its bottom line.
Paying attention to cash flow is especially important as the pressures of inflation affect wages and material costs, the market’s volatility, and supply chain issues.
Cash flow and revenue
Projecting cash flow in the construction industry can be especially complicated because, unlike many industries, cash flow doesn’t always follow revenue recognition. As revenue is recognized over time, most often measured by the percentage of the job that’s complete, revenue is recognized ratably as a project progresses.
However, if you’re able to invoice for more than the work completed — referred to as overbilling — or, alternatively, only able to invoice for a portion of the work completed — referred to as underbilling — your cash flow will be out of sync with your revenue recognized. As a result, it’s important to understand both the revenue recognition and related cash flow needs of each project.
Where does operations cash flow typically get trapped?
Construction companies often see business cash flow trapped in several areas:
- Billing discrepancies. Ensure that the project teams capture and provide accurate information to help finance teams bill timely and to identify out of scope work.
- Unprocessed change orders. In most cases, costs related to unprocessed change orders can’t be billed until all parties sign change orders. Helping project teams manage and resolve unprocessed change orders in a proactive and efficient manner can help expedite the company’s change requests and its ability to bill and collect for those items.
- Claims. Similar to unprocessed change orders, proactively managing and settling claims early can help improve cash flow and avoid the costs associated with a long, drawn-out negotiation.
Related sections
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