Cash Flow Is the Lifeblood of Construction
More construction businesses fail from cash flow problems than from lack of work. The industry’s payment cycles — where you spend money on materials and labour before your client pays, and where retentions hold back a percentage of your earnings for months or years — create structural cash flow challenges that need active management rather than hope.
A construction business can be profitable on paper and still run out of cash if payments are slow, retentions are large, and the business is growing faster than its working capital can support. Understanding the cash flow dynamics of construction — and building the financial disciplines to manage them — is as important as finding the next project.
Progress Payments and the Construction Contracts Act
The Construction Contracts Act 2002 provides a payment schedule framework designed to support cash flow through regular progress payments and expedited dispute resolution when payments are withheld. Making valid payment claims on time — and understanding what to do when your client or head contractor doesn’t pay in accordance with the schedule — is a basic financial skill for every construction contractor.
The CCA’s provisions for suspension of work for non-payment are a powerful tool for contractors whose clients are slow payers. Used appropriately — after all required notices have been served — the right to suspend creates real leverage for getting paid. Many contractors don’t use this tool because they don’t know they have it.
Job Costing
You can’t manage what you don’t measure. Job costing — tracking actual costs against the estimated costs for each project — provides the information needed to understand where you’re making and losing money, which types of work are profitable, and where your estimates are systematically over or under. Without job costing, you’re flying blind: you might be losing money on every project and not know it until the bank account is empty.
Working with Your Bank
Construction overdraft facilities and revolving credit lines are the standard tools for managing cash flow peaks and troughs. The bank needs to understand your business — its size, its project pipeline, its payment cycles — to provide appropriate facilities. Regular communication with your banker, providing management accounts and forward cash flow projections, builds the relationship that allows you to access facilities when you need them.