4 Secrets to Increasing Cash Flow on Construction Projects

Hey, Construction Legends. So today we're going to talk about 4 ways that you can increase your cash flow pretty easily on a construction project. So hi, my name is Cian Dillon Brennan. I am CEO of a company called Quantum Contract Solutions. We are essentially a contracts department installed into your business, which has expertise in the dispute sector, strategy sector, contract negotiations, and also can help you with all of the paperwork. The reason we make these videos is we know that everyone can't afford our services or, or get to that level and maybe not big enough. And if that's the case, I want to make these videos so that you can implement all of these things into your business that you can grow and then potentially maybe partner with us in the future. So today we're going to talk about cash flow. Why is cash flow so important, right? Obviously, cash flow is one of the biggest constraints. It's probably one of the biggest reasons that construction companies go go out of business. They get their cash flow restricted and restricted and restricted until they go pop. Okay, so when we keep an eye on our cash flow, that's how we get more and more successful. In my view, there are, you know, cash flow businesses or businesses that are very high in cash flow are very successful over the long term. I think Warren Buffett recently, when he was asked about, you know, inflation, what sort of businesses would you invest in? And his response was, I would invest in low capital, high cash flow businesses. So companies that don't have to spend a lot of money on premises, don't have to spend a lot of money on equipment and have a large amount of cash flow. And so there's obviously the other side of it, which a lot of people have seen and hear about and think it's the way to do business. So the Amazons of the world, all of the tech companies, the companies that just took investment, investment, investment from venture capital companies and individual investors to grow their company while making a loss for a long, long period of time, knowing that the enterprise value is going to increase. It's going to be worth the money in the end. So obviously, they're all very— that's a very risky play, but it does pay off. So Amazon is the biggest example of that paying off. But for us normal mortals that don't have access to that venture capital sort of money, or, you know, don't have a software type of solution, then high cash flow should be the priority. And if you've had a— if you've, you know, you've noticed from a cash flow perspective, your cash flow has been good, then you tend to be a much better company because you don't get, you know, bent over a barrel where you have to make a negotiation where you don't want to because your cash flow is so tight. You just need to get the money in to pay your guys, right? That happens all the time. So cash flow, very, very important. And if we can help in a few ways to get your cash flow better, it will make a big difference. So let's get into it. So the first thing, obviously, when we look pre-contracts, so a lot, most of this stuff is actually pre-contract, if I'm honest. So the first thing that you need to look at is the payment terms. A couple of different things in payment terms. If you're asked, to sign 45, 60 days, I mean, obviously that's not good, right? So we want to be looking at 30 calendar days, 20 business days. And we also want to be looking at how long it takes them to process your payment application before they ask you to submit an invoice. So submit it on this date and we'll approve it by this date. Then you submit the invoice against the payment certificate, and then it's 20 business days or 30 calendar days. Got to make sure that you're aware of that whole process. It's not just 20 business days, 30 calendar days from when you submit the first document. Okay? So you got to You gotta consider the whole thing. Now, the end of month one is a very tricky. When someone says, we'll pay you blah, blah, blah, end of month. So let's just say in the example, it's 20 business days, end of month. So you submit your payment application at the end of month 1, doesn't get approved until the first week of month 2. Then you submit your invoice, and then it says 20 days, 20 business days, 30 calendars, end of month. So you gotta wait till the end of that month, and they're gonna add on 30 days. So it's actually quite a long period of time. It's actually 60 days plus. So don't get caught out in that particular thing. It can happen and it does happen quite a lot. So that's the first one. Second thing is in your change order variation or EOT clauses, right? There's multiple clauses. They asked you to notify them within 1 to 2 business days if there's a delay or there's a change on site. They asked you to then submit your extension of time or change order within a certain period of time. Now, Recently, we all know that this has become a contractual tool to use you. You haven't done it, therefore we're not paying you. So be careful of that. But the reason it came around in the first place was because they needed to be able to track delays in project and cost as and when they happened. Because previously, all of the delays and all of the costs used to come in at the very end. And so they'd think everything's going fine and bang, at the end, huge delay, huge amount of costs. And so that was their measure to do it. Similarly, you want to make sure that you're getting paid or you're getting your variations approved in a timely manner. So what you can ask is you can have an assessment period for your variation orders, change orders, and EOTs to be a reasonable amount of time. So if they don't do it, then you can go, hey, you know, the assessment period is 14 days, you haven't done it, let me know why, blah, blah, blah. It speeds up the approval of variations and EOTs because if you've been in construction long enough, I am absolutely sure that you know sometimes change orders and EOTs go into the ether, they don't get approved, you don't know what's happening. The longer they push out, the more your leverage goes down and it just makes it harder and harder for you. More often than not, you've probably spent the money, you've probably got the guys, you've got the equipment, you've done the work, right? We know how it is. So that's the second thing. The third thing I would highly encourage you to do is when you get a bid and there's obviously instructions to the bidders, instructions to tenderers, whatever the terminology is, there may be an option to submit an alternative tender. And if there isn't, do it anyway. Okay? Now, all you need to do with the alternative tender, I know some of you guys are experts and the alternative tender is a great option for you to show how you can do it differently, right? We can do— instead of doing the work that you do the way you want us to do it, we can do it this way, which is going to save you money. And that's fine too, but that's not what I'm talking about. What I'm talking about is from a pricing model point of view. What you want to say is you give them your normal price and say it comes to $100. You say to them, okay, so what we're looking for instead is an alternative bid, is that you pay us, say, $20 upfront. I'm just using easy figures for everyone. $20 upfront. In exchange for this $20, what we're going to give you is a 5% off the total cost. So the cost is now going to cost you $95. So it's cheaper than our original offer. The reason we want to get paid upfront is because COVID, lack of materials, lack of people, you know, we need to get that money working straight away. And when you give us that prepayment, we can get things secured, we can get things organized, and it's going to make it far better for you from a delivery perspective, you know, against the alternative. Okay, so it's pros, like, you know, you're— it's a pro, it's a win-win basically for them. They get a better job, they get a 5% discount, and you're relying on the fact that what So obviously the prepayment is going to help your cash flow massively. It's going to make your life so much easier. You're not going to have to go into debt and to finance and all of that stuff that you probably normally would have to. But what is quite useful is that you can think to yourself like the big companies think. All the biggest and best construction companies think this way, is that if you can make your margin back, the 5% that you lost in post-award easily. So if you're on top of your change order process, you're on top of your EOT process, you're gonna get all of that margin back straight away, really, really easily. And that's so many construction companies, so many of the biggest and best construction companies will win bids at a loss knowing they're gonna make their money back in the post-award phase. So getting the cash flow up front, knowing, giving the discount would probably mean you're more likely to win the project. And you know you're gonna get more variations and change orders back in the post-award phase. So definitely, definitely, definitely something to think about. And the last and very, very effective, regardless of the size of the company that you're dealing with, is when they pay you late, if they are one day late, you are, you hit them with everything, right? On the first time that they don't pay you on time, right? It's day two, or sorry, it's day one after they're supposed to have paid you and it's not on time. Emails go, phone calls go, kick up a stink, right? Because you're essentially training them on how you want to be treated, right? And you have agreements, you ring them up and go, oh, look, we have all of these, you know, knock on, we got, we are expecting this pay from you. We have XYZ to pay. If you don't pay us on time, it pushes everything back. We have an agreement, a contract, blah, blah, blah. You make a stink about not being paid just that first time so that they know that, oh, if we don't pay this guy in time, he's going to kick up a stink again, right? And you wouldn't believe what sort of a difference that makes to your cash flow and getting paid on time. So implement those 4 things into your business. It'll make a huge difference from a cash flow perspective. Cash flow is king in construction. It'll keep you in business for a much longer period of time. That's what we want for you, and I'll chat to you in the next.