Projects

Cashflow

The nature of the construction industry is such that projects can take a year or so to build… Now, no builder is likely to wait this long before getting paid, so payments for work completed are made in instalments (usually monthly- but sometimes in ‘stages’).

Cashflow, during Construction

A healthy, on-track and consistent cash flow (i.e. payments to the builder) is a good sign for any project, and is linked with a busy site.

Cash flow needs to be managed and maintained by the builder, and monitored by the superintendent, to ensure the project finishes on time … and preferably without a last month panic! – a panic where standards drop and mistakes increase.

If a builder is to spend $1,000,000 in 8 months, then they, (mathematically) should average $125,000 per month – and though this won’t happen each & every month it is a good rough guide of potential progress.

If 4 months goes by and they’ve averaged only $50,000 each month, then you might have a problem looming. Perhaps the builder is falling behind schedule, or can’t get subcontractors or materials on-site or is just a poor manager. The last month panic to catch up may compromise quality. Or a late handover of the building may put excessive stress on your client or tenant.

Monitoring cash flow can help you assess this early. Has 75% of the time been spent, but only 40% of the money? Or vice-versa? Is the builder behind but putting some action in place to catch up?

A predicted or anticipated cashflow should be presented by the Builder at the start of the project … so you can monitor progress against this chart.

However, don’t artificially adjust the cash flow by paying for items early, or items that are incomplete or not even on site.  Over-paying and under-paying your builder can both put your client and the project at risk … and you!

Pay your builder properly and promptly

But do note – You do not want to put stress on a builder’s important cash flow by underpaying, under certifying or paying late.

It is essential the builder is paid properly and promptly so that the cash can flow down to the suppliers and sub-contractors – as you really are relying on their deliveries, work, labours and attention to complete your project.

Note: If a builder defaults and has been overpaid, based on your certification, then you may have a problem; as the cost-to-complete (by another contractor) will likely be much higher than the balance of funds leftover in the existing defaulted contract.

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