Maximising construction project cash flow: top tips

This is the final article in our mini-series focused on financial issues facing contracting businesses in the UK construction industry, so I thought I would round it off with some practical tips, or things to think about, when it comes to improving construction project cash flow.

I have decided against an oversimplistic approach which tells you to get more money in than you have going out, and instead have taken an approach which opens up thinking about your options. I hope, on reflection, you see that you have more control over your cash position than you might initially realise which is, if you can get your mind around it, a powerful thought.

As always, I will attempt to cover this in a five-minute article. The whistlestop tour will start with payment terms, work through the way different delivery models can impact cash flow, look at the concept of retention, and finish with adjudication.

Payment terms

Your inflow of cash on a construction project is primarily determined by the payment terms you agree to in the contract, as these govern how you will be paid, what you are paid, and when you are paid.

The drafting in current contracts will be based on the statutory Construction Act provisions with, often, some wild and wonderful amendments to those provisions. A trend I have noticed over the last ten years is, if I was being cynical, drafting which deliberately over complicates what should be a relatively simple process. I wonder how the untrained eye gets their head around this where the due date is not actually the due date because what appears to be a 30-process is a actually 60-day process?

When you peel back the layers of these provisions, you need to understand the period that you are required to cash flow the project. For me, the critical measure is the period between the date up to which the works are valued and the date on which the payment is made.

Check the periods and the process, map them out, and challenge them if they don’t work for you. They may be 'standard terms', but that does not mean they cannot be amended.

Delivery model

While payment terms influence your cash inflow, your cash outflow is primarily determined by how you intend to deliver the project. If you have a substantial amount of off-site manufacture and / or long-lead items, then a large portion of your cash outflow will occur before you hit site, whereas if you have a lot of on-site labour then your cash outflow will be led by your resource model (self-perform or outsource).

If you have a large proportion of off-site manufacturing, or need to procure long-lead items, then you should seek an agreement that ‘materials-off-site’ will be made. If this is agreed, you will be paid for completed components monthly, and those will be vested in the entity who pays. What this means is that the payer has title to the components in the event your business fails, thereby giving everyone what they want – you get cash flow, and they get title to components that can be used to keep the project moving if your business does fail.

If there is a significant labour content, then this will be a drain on cash flow. You might outsource the labour supply which will allow you to pass down payment terms that limit, or eradicate, the amount that you cash flow the project. However, if you self-perform the work, then you will more than likely be paying operatives weekly because that is the industry norm. That can be a cash burden, but this model does bring value to your client, so a discussion about payment terms, to alleviate the burden on you, might be more open than you think it is.

Consider how your deliver model brings value to your client in programme and quality certainty because, through articulating this value, you may find your client is open to a more equitable payment arrangement than you think - at the very least, there's no harm in asking.

Retention

I remember when I first started as a QS and, on the back of the Latham report, there was a lot of industry noise about retentions being an unfair practice. Wind forward 20 plus years and, yeah you guessed it, nothing has really changed.

Retentions are a peculiar concept and, as far as I know, confined to the construction industry: an incentive to finish or a penalty if you don’t. If we think about that concept in the context of an industry where margins are wafer thin, you essentially forego most of your profit for a period of 12-24 months. And even after that period you might have to fight tooth and nail to be paid what is rightfully yours. There were times where subcontractor retentions were seen by contractors as a profit improvement opportunity: hopefully those poor practices are behind us?

Maybe we will not eliminate retentions as a practice, but there are a couple of things you might do that might help. Negotiating the percentage and periods is the most obvious, the other is to link retention release to an event that is inside your control, and a final option is a retention bond.

Adjudication: the nuclear button

In a perfect world, an adjudication process should not be necessary.

You have done the work, done a good job, and you should be paid fairly for the work you have completed. However, there are a whole series of reasons why that payment is delayed or not paid in full. You then have three options: walk away and write off the debt; patiently continue knocking on the door until payment is made; escalate the dispute through the contract (adjudication normally being the best available option).

The step is not as big as you think or as scary as you might think. Ultimately, you have one view of the valuation and someone else has another, you cannot agree on the valuation, and you want an impartial person to make a decision that will temporarily bind us until one decides to take it further.

I would recommend taking legal advice before adjudicating, or even indicating that you will take this step, as the process can be a procedural minefield and you want to make sure you get it right. However, even the mere possibility can unlock those final account discussions fairly swiftly.

Final reflections

Hopefully, an exploration of these options helps you reflect on the options available to you if you feel that your cash position is out of your control and you are at the mercy of others.

In our next mini-series we will share learning from the Quantik team about various applications we have trialled. The articles will be practical and look at the application from a QS perspective and feedback what we found useful and not so useful. We hope that this encourages subscribers to follow suit, trial applications, and share that experience (good and, maybe, not so good).

Keep an eye out for that and, in the meantime, enjoy the rest of your week!

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