Managing Cash Flow in Construction

The construction industry is notorious for its poor payment practices, with SMEs reportedly owed £30bn in unpaid invoices. Whilst the government has tried to tighten up the Prompt Payment Code, and payment practice reports have cast a light on contractor speed, late payments continue to be a major challenge facing construction SMEs.

Then came coronavirus. A study showed that the national lockdown cost the UK construction industry £301.5m a day. When lockdown measures started to ease there was optimism that the industry was recovering however, an ONS survey showed 46% of firms suffered a reduction in their turnover between 27th July and 9th August.

Even as firms get back to work, many of their ongoing
projects face long payment delays and new restrictions cast a shadow over the
certainty of future work. Given the current economic climate, managing cash
flow has never been more important. Here we offer some tips on how SME trade
and construction firms can manage their cash flow during the pandemic.

Forecast

Although it’s difficult to know what’s round the corner at
the moment, you should try and forecast cash flows and expenses so you are (as
much as anyone can be at this time) prepared for outlays which will impact cash
flow.

Cash flow management software can be useful and major cloud
accounting software providers such as QuickBooks or Sage offer integrations
with a variety of different cash flow forecasting software.

Shop Around and Spread the Cost

Shop around between suppliers and let them know you’re doing
so. Tell them you’re after the best price and they may offer a discount to
secure the sale.

If there is an option to do so, you should also spread the
cost. Whilst you will have to pay interest on the purchase you won’t be out of
pocket for the full amount, freeing up money to use for operating costs.

Strengthen Your Payment Processes

Automate your invoices and send them as soon as possible,
ahead of time if you can, to maximise cash flow. Whilst tradesman in particular
may be used to accepting cash payments on the job, you should by now be in a
position to accept electronic payments on the go.

When billing, reduce potential payment delays by including
all the billing information the customer requires. Avoid under or over billing
where you can and bill according to how much of the project has been completed.

Keep Track Of Your Progress

Make sure you know where you are in the project and how work
is going. Factoring in delays and agreeing a solution with your customer could
lessen the financial strain of your project falling behind schedule.

Manage Customer Disputes

Get into the habit of documenting any issues or delays with
the project. Perhaps an error was made by another subcontractor, or the project
was delayed due to an issue in the supply chain. With a rise in Pay Less
Notices, it is important to document and obtain photographic evidence of
anything which could be used to dispute your payment. If this happens and you
have to go to arbitration, seek professional advice.

Covid-19 Cost Assessment Toolkit

The ever changing nature of the pandemic means that the information upon which estimates are usually prepared can no longer be relied upon. To tackle these issues, the Construction Leadership Council (CLC) has published a methodology for assessing and reporting the cost implications of disruption brought about by coronavirus. The toolkit allows clients and supply chains to compare their project costs against an aggregated data set. It’s hoped that by providing tools to measure and improve productivity, it will help those in the industry understand project risks and establish long term viability.

As new lockdown measures are announced, the disruption caused
by Covid-19 seems to have no end. During this precarious time, businesses must
do what they can to manage cash flow. However, getting into these habits now will
continue to benefit you in the future.

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