Executive Summary:  Managing cash flow is imperative and it never hurts to see these challenges on paper.  This article reminds you as the owner, the chief financial officer, or as a member of the project management team of the challenge of staying cash positive.

Cash is king.  If you’ve had a career with a large cash-rich company, you may not be familiar with this phrase.  If you had your own business or worked in a smaller company, keeping a positive cash balance in the bank can feel like having your shoulders and chest in a body-sized vice for most of every month.  Here’s a possible monthly cash flow diagram for a 10-month long job with a $1,000,000 contract value:

There is practically an infinite number of variables in a project affecting cash flow.  If you made your own cash flow chart like mine above, it would certainly look different.  Here is a brief description of the variables and calculations of values used in the above cash flow graphic:

• Insurance – insurance is paid in advance for the company, one year at a time. So, if you renew your policy(ies) today, the annual payment is due today.  You can pay it incrementally, but only to the entity who financed your upfront lump sum payment to the carrier.  The chart assumes this company owes a $100,000 payment today (six months ahead of the project start date) and does $15,000,000 worth of work. I included 1/15^th of this $100,000 premium.
• Bond – when you get the contract from the owner, the first call you will make is to your surety agent to get the performance and payment bonds coming. The bonds come right away and so does the invoice.  The value of the bond was slightly over 1% of the $1,000,000 contract value.
• Labor – labor wages are due weekly to employees, weekly to the government for taxes, and monthly for union dues. I assumed 35% of project cost was labor.
• A/P (accounts payable) & other – vendors (accounts payable) expect to get paid anywhere from today to 45 days out. The chart assumes 20% of the contract is accounts payable.
• Fuel – fuel is expected by many vendors to be a weekly payment and some fuel suppliers will only provide fuel if they can make an automatic weekly deduction from your bank account. Total fuel value of $35,000 was used in this calculation.
• Subcontractors – this should be a cash neutral expenditure. Your subcontracts should read pay when paid.  We used $350,000 as our subcontractor cost value.

Regarding income, it is a much cleaner schedule with less variables:

• Progress payment – the first payment request is generated on day thirty (30) of the project and is received forty-five (45) days after your request – this equates to you having to cash flow labor, for example, for approximately seventy-five (75) days. This pattern of Net 75 continues for the duration of the project.
• Retention – notice that 100% of our fee is in the retention. We don’t receive this final 5% payment until after all closeout paperwork is completed.

Here are some takeaways and other observations from the graph:

• Zero line – this is the cash neutral line (neither cash positive, nor cash negative).  Ideally, we want the cash flow (fuchsia dashed line) to be positive which is above the zero line.  Notice on our project, we weren’t cash neutral until two months after the project was complete.
• Cost of money – if you have to tap your line of credit, this should be an expense to the owner; even if you don’t tap your line of credit, you’re using your own funds and the owner should pay for that too. Consider adding a line item in your bid for cost of money.  This graph should clearly depict that a lot of contractors finance work.

My story. My story is no different than anyone else’s story in regards to trying to get to or stay cash positive.  I always tried hard to:

• Bill aggressively – as you can see from the graph above, it is quite possible that your project will be in a negative cash position for a large portion or certainly over half its lifespan. Try to:
  • Bill into the future – if you are generating a bill on the 20^th for work through the 30^th, assume sunny skies and great productions
  • Ask to “overbill” items to offset change orders – if that $50,000 change order isn’t coming through on this pay application, ask to overbill a contract item to compensate for the owner’s lack of payment on the change order work performed this pay period, but not being paid
• Bill timely – hand an invoice to your client when (s)he wants it; if it’s due on the 30^th, get it there by noon on the 30^th at the latest.
• Bill clearly – an invoice which is easy-to-read and complete with information that the owner requires (invoices, receipts, tax clearances, notary acknowledgments, etc.), you will get paid more quickly

I enjoyed positive cash flows as much as 20% of the contract value over half the project on the good jobs.  Bill your change orders timely and stop complaining about the hassle of all the paperwork.  He with the gold makes the rules (that’s not you), and if your client (the person with the gold) wants all of these bells and whistles, provide them so you can get paid!