Beacon News

Mike Kinahan is a Project Manager in Beacon's Medford, MA office. We asked Mike to weigh in on some of the ways Construction Project Cash Flow issues can get contractors in trouble and what can be done to head off cash-flow-related problems before they get out of hand.

Question: Mike, how do contractors typically get in trouble when it comes to managing cash flow on construction projects?

Mike: Contractors will often “front-load” their projects to get more funds up front. In other words, they may request more money during the early phases of the project than is actually needed to cover the costs during those early times. This helps with their cash flow over the beginning of the project but we have seen cases where that money is not properly managed to fund future expenses and there ends up not being enough money left to finish the project. Contractors run into issues when they front-load too many of their projects too heavily and start to spread those funds across projects--particularly if there is another project that needs an influx of funds to achieve completion.

Question: When consulting on a project, how does Beacon help to identify possible cash flow issues on a project before they become a problem?

Mike: This varies greatly from project to project, but in general Beacon analyzes the accounts payable to date along with all recent subcontractor payment applications for payments due and the remaining funds due to the subs. Additionally, Beacon will confirm all spec sections are bought out, and if not, we will estimate a remaining buyout amount for the items that have not been bought out yet. Sometimes it very clear upon reviewing the project documentation that the contractor did a poor job of managing cash flow across jobs because they ran out of funds on a project that was heavily front loaded.

Question: What are some of the ways that Beacon helps to resolve cash flow issues when helping to manage a project?

Mike: For the most part, when Beacon is involved in a project on behalf of a Surety, we help to ensure that cash flow requirements are clearly documented and communicated, based on the project schedule and various contractual milestones for payments to subcontractors and vendors. In some cases, the Surety will need to inject funds into the project to pay the outstanding AP and subcontractor balances. Beacon also provides full-service Funds Control for some projects. Our Funds Control services are tied to a formal plan for professionally managing payments so that they track closely with progress on the project and avoid "front loading."

In addition to the information provided by Mike, below are some of the ways that GCs sometimes end up with cash flow problems. When Beacon analyzes a project, these issues often become apparent just by looking through project documentation and communications:

• Underbidding a project. Beacon's bid review and estimating services can help to avoid cash flow issues which start with a contractor (or subcontractor) who underbids a project in the first place.
  
• Inadequate Systems / Processes for Project Management. If a GC is not professionally managing a project using a project management system, they are often not doing a good job with cash flow management too. An area which can become problematic is "change order management." It's critical that any change orders are properly estimated and factored into the overall cash flow management plan for the project.
  
• Poor Planning / Scheduling. It's critically important to have contractual milestone payments from project owners coming in time to fund major work being completed on the project. Depending on the size of the project and contract terms, the GC may need to have an appropriate line of credit with their bank in order to cover the "gaps" which may occur in some cases.
  
• Accounts Receivable (AR) Function. Some contractors are not on top of the critical process of getting paid by their customers in a timely manner. This requires issuing invoices immediately when contract milestones are reached and following up professionally on past-due accounts.
  
• Following Through At Project Completion. Many contractors are bad at finishing that last 5-10% of the project and can therefore be missing out on collecting a final milestone payment which may be much greater than the small amount of effort required to complete the project.