It鈥檚 hard to overestimate the impact of cash flow during a construction project. Cash flow keeps materials coming, workers paid, and everything running on schedule. Without it, construction projects can be delayed or even fail.
鈥�Stage payments are one of the strategies construction companies can use to ensure enough cash is available to keep a construction project on track. In this article, we鈥檒l go over the different types of payments in the construction industry and discuss how stage payments can help contractors maintain healthy cash flow throughout a project鈥檚 completion.
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What is cash flow in construction?
Cash flow refers to the money coming into and going out of a construction business over time. A healthy cash flow means there鈥檚 always enough money to pay the near-constant influx of project and administrative expenses a contractor incurs.
While all businesses rely on cash flow planning to keep their bills paid and their lights on, some unique aspects of the construction industry make cash flow maintenance particularly challenging. Project owners should be aware of the following factors that often cause cash flow issues in a construction project.
Inaccurate bidding
Every construction project is different. Without a firm grasp of all the project parameters, a contractor can underestimate project costs. When costs exceed payments, the contractor must pay the remaining expenses out of pocket.
Materials cost changes
Even the most accurate bids don鈥檛 protect contractors from money shortages. Materials price changes occur often, and sometimes in a very short time. When this happens, the contractor may have to pay the difference in materials charges out of project margins.
Change orders
As a project progresses, the owner or general contractor often has to change the plans because of an unexpected complication or because the owner has had a change of heart on an element of the construction project.
Long payment timelines
It can take weeks or even months for a contracting client to settle up on an invoice. There are plenty of reasons why this happens but no matter the cause, slow payments can stifle cash flow and cause project delays.
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How to schedule payments to improve cash flow
Construction owners make payments to contractors based on the payment schedule laid out in the construction contracts. Through those project contracts, contractors can arrange to be paid for their work in several different ways. Lump sum payment, for instance, can either be made at the beginning or end of an entire project.
Stage payment contracts stipulate that payments come due over the course of a project鈥檚 completion, either on a regular preset construction payment schedule, when costs arise, or when certain project milestones are met.
The following are a few examples of stage payments that owners and contractors may arrange through a construction contract.
Monthly payments
Some construction contracts allow for monthly progress payments in regular intervals to contractors based on how far construction work has progressed in a given month. Contractors using progress billing may have to calculate a percentage valuation of the contract sum as completed and get paid according to that estimate.
Milestone payments
Contracts that allow for milestone payments set out specific project completion stages, the payment milestones, at which owners will make payments to the general contractor. Examples of these payment milestones include when funding is secured, designs are approved, or the contractor completes a project phase.
Time and materials payments
Contractors working according to time and materials payments must bill owners according to the labor hours worked and materials costs incurred during the payment period.
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How stage payments can help maintain good cash flow
Anybody who鈥檚 tried to run a construction project, whether small projects on a household budget or a multi-million dollar capital building project, knows it鈥檚 easy to get ahead on spending only for the money to run out before the next scheduled payment arrives.
Avoiding failure means planning ahead, spotting trouble spots, and paying bills strategically to leave enough cash in place for urgent needs and ongoing costs.
Strategic timing for better budget control
As a new project phase is about to begin, contractors may have to bring on a new set of subcontractors, more materials, and specific equipment to complete the work. With enough planning and willpower, contractors may be able to stay within budget no matter which payment contract they use. However, stage payments can make the budgeting and cash allotment process more manageable by releasing funds when needed most.
Stage payments act as performance incentives
The dangling carrot of a milestone payment might push a contractor to complete a project phase faster, which benefits both the general contractor and the client.
Avoid debt and the costs it incurs
Some contractors may use a cash flow strategy that uses debt to fund project expenses until the next payment comes in. While a useful and worthwhile approach, debt incurs its own expenses, including account fees, administrative costs, and interest charges. A cash flow strategy that uses interim payments in place of some of that debt can diminish those additional costs.
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Other practices that can protect your cash flow
Regardless of your payment schedule, your spending and invoicing habits can impact your cash flow and ability to keep up with project costs.
Practice good invoicing
Ensure your invoices include all the necessary information to get you paid, including your business name and address, invoice number, date, detailed rundown of services rendered, and the invoice total. Make it easy for your customers to pay by including 吃瓜新闻 payment links in your invoice. Don鈥檛 be afraid to follow up on unpaid invoices.
Never lose the thread on a bill
The best way to protect your cash flow is to have a steady eye on the bills and expenses coming your way so that you can strategize accordingly. With 吃瓜新闻, you can import invoices and bills from your accounting software, pay vendors and collect payments instantly and automatically mark them as paid.
Manage your spending
The best cash flow plan can be thrown off by unplanned last-minute spending. Get things done without getting off track. Take control of your card spending by placing limits on staff cards and automating receipt upload through 吃瓜新闻.
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Stage payments for cash flow management
Stage payments allow contractors to receive payments throughout a project鈥檚 lifecycle, paying for expenses as they arise and providing better control over project spend. They can also provide incentives for faster progress, benefiting owners and contractors.
Using construction documents to structure your payments throughout a project can help you manage your cash flow, ultimately increasing your odds of project success.
Try using stage payments along with digital payment solutions like 吃瓜新闻 to keep your project moving and well-funded from start to finish.
