We are entering a point where everyone is thinking about getting back to work and leaving our work from home experience. That is a good thing to think about! But what is the most efficient and profitable way to do that while keeping your employees, customers and subcontractors safe? Here are a few tips to make that happen.
Number 1 Priority: Communicate
Many construction companies had crews working at project sites during the work-from-home mandates. However, customers and suppliers may not have been fully staffed—particularly in the back office functions. It is extremely important to be in contact with everyone in the supply chain.
- The financial team should call (or Zoom) the financial staff of each owner or other contractor they have been working with to evaluate their current condition. The team should determine if the other businesses have been processing pay apps and been in touch with the back office function of the owner, as well as determine their financial state (if possible). The most important determination is whether they are in a position to pay and in what time frame.
- The financial team should also be calling sub-contractors and suppliers. It is important to know if subs have been paying their suppliers. Are subs and suppliers in a financial position to continue doing business through the next 60 days? If they are short on materials or supplies, how will that affect particular jobs? Contractors need to understand the extent of these risks as soon as possible.
- Check in with the surety bond provider. If the surety has any plans for less flexibility with key financial metrics during these challenging times, it’s best to get an understanding of those liquidity requirements now to avoid being surprised later while bidding a job.
- Stay close to the bank. Many (if not all) were working closely with the bank during the PPP loan process. However, that was money guaranteed by the federal government. Loans guaranteed by the bank itself is a different story. It is important to let the bank know what the expected borrowing needs might be over the near term. As discussed below, it is important to have a short-term outlook during the start-up period. Finally, consider establishing a secondary banking relationship to ensure access to cash.
- Project timelines could continue to be affected by social distancing guidelines and recommendations (i.e., crew sizes and number of crews allowed to be on site) for the foreseeable future. This not only adds time but will likely have a dollar impact to each project as well. Communication between the subcontractors, general contractor, construction manager and owner/owner rep are as imperative as ever.
- Communication on design changes are also important during this time. An open-concept design may no longer be supported going forward, which could cause significant re-design and engineering on multiple fronts, requiring significant communication and negotiation.
- Contractor and owner management teams may have also seen changes in their management structure, which could cause additional need for more coordination and communication. This may very well be an opportunity to strengthen relationships and develop new methods for collaboration between parties.
Some construction companies have not been able to continue working during the last couple months. It is even more important for these companies to contact each link in their supply chain right now. Don’t wait for the start up to begin.
Number 2 Priority: Manage Cash Flow
It is important to ensure cash and working capital is sufficient to start and/or continue operations. Some tips to manage your cash include the following.
- As mentioned above, first consider short-term needs when managing cash flow. Once the contractor can be assured it can continue to be liquid over the first four weeks of the start-up, it can then look further out.
- The financial team should be working with project managers to prepare monthly and quarterly cash flow reports by job. Knowing which jobs are generating cash and which jobs are using cash is critical information needed to manage cash flow for the company.
- Develop a cash flow forecast by week for the next four to 12 weeks. This can be done in excel if accounting software is not capable and it should take into consideration many of the issues discussed below. Of course, this will still be a forecast. For each assumption that goes into the forecast, contractors should also develop a degree of probability. For example, projects that are in backlog over the next two to four weeks could have a probability of 100%. However, the probability that the customer will pay for the work is not 100%, even if the contractor have worked with this customer for the last 30 years. Times are different.
The probability estimate applied to each assumption in the cash flow forecast will help contractors determine what the most likely outcome is for the business over the next four to 12 weeks (in this example). It will also help contractors understand if more actions are needed to realistically remain cash solvent. Additionally, it will show the bank that the company understands the business and is realistically assessing the likelihood that future events will occur. - In the end, a cash flow forecast will provide contractors a road map on what needs to operate the business. It will also provide peace of mind that the owner knows where the business is going and will survive this economic catastrophe.
- Talk to the bank about increasing the line of credit. Once contractors understand short-term cash needs, let the bank know how much working capital the company expects to have over the next few months. It will then be able to discuss with the bank what the appropriate line of credit is to cover the potential pitfalls in the cash forecast. Similar to the cash flow forecast, a sufficient line of credit based on the best estimate of cash flows will provide peace of mind and allow contractors to run your business with a clear mind.
- Know the inventory and material requirements inside and out. This is a period of time when contractors want to make sure they have sufficient materials on hand or access to the materials through suppliers. Many construction companies will be ordering replacement inventory when the economy bounces back. The supply chain will be stretched thin. Don’t assume the usual lead times apply. Don’t assume that suppliers have their normal inventory levels and are paying their own bills.
- Bill promptly and completely. Bill as much as ethically possible in the front end of jobs. Again, communication with the owner or general contractor is extremely important.
- Do not rely on insurance policies to cover pandemic costs. In many cases, there is specific exclusions for events similar to this. If contractors think an insurance claim may be possible, it must ensure it is aware of the notice and other key policy requirements.
The only priority over the next few months is staying financially strong to ensure your business survives. Communication with supply chain partners, banks, surety and customers is critical to understand the road ahead. Sound cash flow forecasting management will be necessary to survive the bumps ahead.
Click here to read the original article on RubinBrown’s Construction Services Blog.
