This article is sponsored by Siteline.

Effective cash flow management is crucial for the success of every business, especially in the construction industry, where upfront costs and complex payment cycles often force contractors into negative working cash cycles. To ensure your organization is well-prepared for 2024, here are seven essential strategies to enhance back-office efficiency and improve cash flow operations.

Reduce Payment Delays

To reduce payment delays — or achieve the ultimate goal of eliminating them — you and your team must understand the requirements for getting paid. Before starting a project, ensure all stakeholders have thoroughly reviewed the contract, paying close attention to factors that directly impact cash flow. These include:

• Payment application requirements like:
  • The type of payment application form you need to use for the project.
  • Whether the payment application needs to be notarized.
  • The deadline for submitting payment applications.
  • How to submit the payment application.
• Lien waiver requirements like:
  • The specific lien waiver forms you’ll need to use.
  • If the lien waivers must also be notarized.
  • When and how to submit the lien waivers.
• Change order requirements like:
  • When to notify the client of the change.
  • How much time you have to submit a change order request after notifying the client.
  • How frequently you need to provide the client with a change order log.
• Retainage requirements like:
  • The retainage amounts for both labor and materials.
  • Whether these rates are fixed or variable.
  • Any other actions needed for the complete the release of retainage.

By being vigilant about these factors, you can avoid mishaps that could delay your payments.

Negotiate Favorable Payment Terms With Clients & Suppliers

Optimizing cash flow involves managing both inflows and outflows. Take the opportunity in 2024 to negotiate favorable payment terms with your clients and suppliers. This may include:

• Extending payment terms.
• Negotiating discounts for early payment.
• Negotiating reasonable payment milestones.
• Using progressive invoicing that aligns with project milestones.
• Exploring alternative financing options.

Before entering into negotiations, have a clear understanding of your costs, including materials, labor, and overhead. This knowledge will help you ensure that the payment terms you agree to are fair and realistic.

If you’re unsure about any aspect of the negotiation process, seek advice from your legal team. They are there to help you navigate the complexities of contract law and protect your business interests.

Increase Collaboration Between the Field & Back Office

Clear communication between project managers and accounting teams is crucial to avoiding financial discrepancies that can negatively impact your business. Streamline field-to-office communication by:

• Establishing an effective chain of communication, complete with defined roles and responsibilities.
• Implementing cloud-based software to facilitate real-time information sharing.
• Digitizing and consolidating all work-related materials into a centralized location.
• Leveraging project PMs to facilitate payment discussions, track payment milestones, and take action when payments are delayed.

Leverage Billing Projections to Predict Backlog Fluctuations

Regularly analyzing billing projections is essential for identifying potential cash flow issues early on. Anticipating dips in your backlog can ultimately help you:

• Implement cost-saving measures (e.g., expense tracking and control, regular budget reviews, cost benchmarking, and supplier negotiations).
• Place timely bids on upcoming projects to maintain a steady cash flow.
• Improve efficiencies by aligning workflows, project schedules, and staffing levels with the expected workload.

To use this strategy effectively, construction companies should maintain accurate billing records, establish clear billing processes, and use financial intelligence software to analyze historical billing data and generate projections.

Regularly Analyze Accounts Receivable Data

Beyond enabling organizations to understand their financial health and identify potential issues, regularly reviewing accounts receivable (A/R) data can help set more accurate revenue and cash flow projections.

Pay close attention to your A/R aging (or days sales outstanding), which measures the number of days between submitting a pay application and receiving payment. Tracking this metric can help you stay on top of collections by:

• Ensuring that clients are adhering to their contractual payment timelines.
• Identifying patterns and trends in late payments.
• Determining any upfront costs that need to be covered to bid confidently.

Establish an A/R Escalation Plan

Keeping close tabs on your A/R aging data is essential to creating and implementing an A/R escalation plan. A well-defined escalation plan will help guide your team to take the right course of action when cash flow issues arise, enabling them to resolve the issue effectively to avoid lengthy payment delays.

Some tips for creating a rock-solid A/R escalation process include:

• Establishing firm payment terms with clients and including these terms on every single pay application so that your expectations are clear throughout the project’s lifespan.
• Creating a protocol for responding to overdue invoices — and sticking to it. Some things you’ll want to consider when structuring this include:
  • How frequently your team will send follow-up emails to the client in the coming weeks.
  • When it’s appropriate to escalate this outreach to phone calls.
  • When it’s time to involve other individuals in the process (e.g., PMs, operations managers, executives).
  • When it’s time to file a lien and get lawyers involved.
• Notifying executives of outstanding payments at the start to avoid surprising them and enabling them to quickly find a workable solution should the situation escalate to them.
• Communicating roles, responsibilities, and expectations with your team so that anyone who may be expected to help chase down payments is equipped with the knowledge to do so.

Leverage Technology to Eliminate Manual Processes

Manual processes in construction back offices are often inefficient, error-prone, slow, and overwhelming. However, purpose-built billing software can streamline these processes and minimize oversight. The following are examples of workflows that can be automated.

Pay Application Creation & Submission

Technology that streamlines the time-consuming process of assembling and submitting pay applications can improve efficiency, reduce errors, and speed up payments.

Vendor Lien Waiver Collection

Software that can manage lien waivers, track their status, and prevent rejections due to missing waivers can significantly impact your organization’s time-to-payment.

Change Order Management

With a digital change order log, teams save hours reviewing spreadsheets and tracking updates. What’s more — these tools can provide valuable financial insights for more informed decision-making.

Implementing technology in these areas can free up more time for you and your team to focus on strategic initiatives that drive business growth.

As we enter 2024, construction back office teams should (at the very least) review these cash flow management strategies to expedite payments. If you’re already fulfilling these objectives, more power to you! But if you think your organization could benefit from these tips, it’s worth noting that these strategies are flexible and can be customized to fit your unique circumstances, setting the stage for a more efficient and prosperous year ahead.