Kenneth C. Gardiner, CPA, CCIFP, CDA, Dannible & McKee, LLP
With inflation at its highest since the early 1980s, contractors are required to fund higher construction costs to perform the same construction operations. The cost of materials and labor have increased significantly, and cash requirements have never been higher. It takes money to make money, and contractors need cash to mobilize projects, fund payroll and stay afloat.
Here are 10 strategies to help preserve cash flow and reduce construction costs:
- Negotiate and ask for material escalation provisions– Historically, escalation provisions have been limited to asphalt and a few other commodities. It is becoming much more prevalent to obtain escalation on a wide variety of construction materials and equipment. Many contractors are approaching contract owners and negotiating inflation-oriented contract increases.
- Manage over- and under-billings – One of the best sources of cash flow is over-billings. Manage bid and pay items to front-load as much profit as reasonably possible into early construction phases. Use the early cash flow to reduce line credit borrowing and fund project costs. Conversely, minimize under-billings; discuss pay items with project engineers to confirm when items can be billed on applications for payment. Strategically time when significant material purchases need to be paid to suppliers to when you can bill the owner for these materials and equipment.
3.Explore new sources of products and materials– Now might be the best time to research new sources of products and materials. Inflation and ownership transition in the construction materials and suppliers’ industries may create opportunities to forge new relationships with vendors hungry for new business. We have seen relationships that were once deemed taboo turn into new opportunities for better pricing and/or payment terms. The Internet also may be a great source of new supplier opportunities.
4.Teamwork– Make sure construction teams work together with purchasing personnel to obtain the best price and delivery options. Don’t let construction teams purchase goods and services in a silo. Centralize purchasing as much as possible at the home office, or at least make sure large purchases amongst projects are coordinated to maximize volume purchase pricing and related discounts.
5.Contract outside advisors– Stay connected to your outside advisors. Industry professionals such as accountants, legal counsel and construction industry associations can help identify federal, state and local programs to assist contractors with programs, such as was the case with the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC), that can provide substantial government incentives to maintain your workforce and provide much-needed cash flow.
6.Billings, collections and year-end payments– Review your billing and collection policies. Consider emailing invoices, applications for payment and other communications with customers. Provide electronic payment options such as EFT and credit card options. Negotiate better payment terms with vendors. Offer wire transfer payments on a specified due date or use credit card payment services to provide additional cash flow or credit card rewards to extend cash terms or use rewards for future purchases.
7.Subcontractor and supplier buyouts– Despite having quoted prices, consider going back one more time to negotiate or obtain better pricing on significant subcontract or supply contracts. You might be able to hit on a few cost savings that could have an impact on overall job profitability.
8.Review equipment needs– For contractors with significant rolling stock and equipment operations, consider a review of equipment usage on current and future projects. Sell off idle or low-usage equipment for new purchases. Look at short- or long-term equipment lease options vs. financing purchases. The acquisition of new equipment requires a cash flow analysis, including an increase in cash for potential reductions in repairs and maintenance to replaced equipment and a decrease in cash for interest components of any long-term financing.
9.Evaluate estimated tax payment requirements– Whether you are a regular tax-paying C corporation or a pass-through entity, consider deferring estimated tax payments to assist in short-term cash needs. Most taxpayers believe you must make estimated tax payments equal to your prior-year tax. Evaluate current year profitability and determine if you can adjust estimated payments based on your current year’s quarterly taxable income.
9.Lines of credit– While most contractors have a line of credit, the best time to ask for an increase or expansion of your line is when you don’t need the money. It might seem counterintuitive, but banks may be hesitant to lend money when you need it, however, tend to be much more willing to increase or provide a line of credit when you demonstrate healthy cash flow management. With inflation and costs dramatically increasing, now might be the best time to request an increase in bank borrowing availability before it is too late.
It’s not likely the impact of materials inflation is going to reverse, and it looks like the “new” costs are here to stay. Additionally, there is no way to reverse labor inflation, so we are all going to have to manage the impact of increased costs. These are just a few suggestions to help you improve cash flow, manage costs and increase profitability.