Spring 2012 issue of Horizons

Construction - continued

Customer and Subcontractor Health In today’s challenging economic environment, it is critical to carefully monitor doing work with others that may be on shaky ground and could still go out of business. For contractors, it is important to diligently research potential customers, looking at work previously performed, payment history, credit, character and ethics. For general contractors, it is important to pre-qualify subcontractors and vice versa. All parties need to closely scrutinize the financial stability of those that you will be working with – your success and profitability on the project is entwined with theirs. Collections & Change Orders Maintaining and improving cash flow also revolves around a strong collections function. Collections must be a daily mindset and not an end of the month activity. This mindset begins with the fact that collecting your accounts receivable is a right and not a privilege. It may help delivering large invoices in person or personally collecting checks to help reduce excuses and delays. Although it may involve offending a customer, the rights of the company must always be protected. With already low margins, delays in receiving payments or failure to collect for all work performed could be disastrous to a company’s cash flow. Other cash flow areas to focus on include change orders and retentions. Change orders should be monitored closely. For scope changes, encourage signed authorizations in the field before beginning work to reduce subsequent disputes on billings arising from change orders. In addition, the retention percentage and phase- out period should be carefully negotiated. In order to speed up recovery of the retention as soon as possible, it is important that contractors focus on being great “closers.” All punch list items should be quickly completed along with understanding and exceeding the final expectations of the customer.

During lean economic times, a natural tendency is to take work – any work – at little or no margins just to utilize company resources. Such practices may put serious strains on a company’s finances if done on a regular basis. Effective cash flow management can actually occur when contractors decline to bid on certain low margin jobs. Contractors should also be careful on bidding work outside of their “sweet” spots or areas of expertise. These challenges could include both technical skill and geographic location. If contractors are unfamiliar with certain types of work, they may not have the technical expertise to properly execute and safely perform the project, or leave important elements out of their bid. If a company is operating in an unfamiliar region, geographic hurdles could include labor and state/local regulatory approvals.

Raise Your Expectations

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