Six Ways Contractors Can Improve Cash Flows

By Lynn Pearcey, MBA, Copywriter, AIA Contract Documents

June 17, 2024

Having adequate cash flow is always a concern for construction contractors. Pay lags and delays can cripple a construction firm financially and, in the most extreme cases, force them to close their doors. Cash flow impacts every facet of a construction business. From hiring to marketing, investing in machinery and ultimately, the types of projects pursued, there is no getting around the pervasive role cash plays in running a business.

Improving Cash Flows

In construction, cash flows matter and any contractor looking to position themselves to get the most out of theirs must adhere to the following six tips.

  1. Maintain a Good Credit Rating: In business, cash is king, but credit is close behind. Credit is essential in personal lives, but in many instances, it matters more in the lives of a business. With a strong credit rating, a contractor can withstand pay lags that lead to cash flow challenges. As such, contractors must protect their credit at all costs as it gives them the flexibility they need to navigate the cruel financial terrain of the construction industry. The truth for many contractors is that good credit might be the difference between a firm’s doors remaining open or going out of business.
  2. Secure a Lengthier Finance Structure: Heavy equipment is a staple of a construction site, and that equipment comes with a heavy investment. The equipment investment is necessary, and monthly payments are part of the equation. With good credit, a contractor can negotiate favorable interest rates and longer repayment terms, resulting in lower monthly payments, which will ultimately help cash flows.
  3. Send Invoices Expeditiously: The sooner a contractor gets their bills in the hands of their client, the sooner they can get the cash due. As such, contractors should develop an efficient invoicing model that positions them to receive payment expeditiously and avoid crippling cash flow lags.
  4. Provide Discounts for Early Payment: Discounting early payments is a common practice in the construction industry, as the prevailing wisdom among contractors is that some payment is better than none. Contractors who choose this route should be careful not to dip too far into their projected profit margins, as doing so could adversely affect cash flow and make the discount null and void.
  5. Offer Versatility in Payment Options: A good rule of thumb concerning payments is offering the client as many options as possible. From credit cards to checks, apps, and of course, cash, contractors should provide as many methods of payment as possible to realize their ultimate goal of getting paid and keep cash flowing in a positive direction.
  6. Bid Correctly: The urge to underbid to appeal to a client is often irresistible, but this approach can be a detriment to a contractor looking to responsibly grow their business. When it comes to vying for business and projects, contractors should bid with confidence and integrity, valuing their services, and demanding the same from the clients they’re servicing.

Conclusion

For a construction contractor, being in a strong cash flow position is critical to their success. Sometimes, a firm can find itself at the mercy of the client when it comes to securing payments that feed directly into the cash flow statement. There are, however, things a contractor can do on their end to make the situation more palpable. Paying attention to credit is one of the first steps to take. Credit stewardship is an ongoing process and one that should always be given the utmost attention.

Contractors must also remember to be strategic when it comes to cash flow. Asking for longer finance terms is one way as it keeps more cash in-house and buys a contractor time. Other strategies include the timely dispersal of invoices, incenting clients through discounts and above all, bidding correctly when it comes to potential projects. Adhering to these time-tested methods will help any contractor maintain viability while keeping cash flows moving in a positive direction.

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AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.