Construction pit falls

John and Mary have a residential construction business.  They build multi-unit dwellings, mostly triplexes and fourplexes, for private investors.  Currently they have five projects on the go, each at different stages of development with different field teams on each job.  With so many projects on the go, the couple always seem strapped for cash.   They believed that they were smart with their pricing – they asked for 25% of the project funds up front and set up a payment cycle for each stage of building, but 10% was always held back to the end once all the deficiencies were addressed and clearances and building approvals were received.  Each company had its own letters of incorporation so there was legal separation between them.  But often, the couple was finding themselves borrowing money from one project to meet cash requirements for another and they realized this was not a sustainable way to operate.

Mary hired Ivan; a project manager who could help her get control of finances.  Ivan crated a cash flow plan for each project.  He started with the original budget for each project and then collected all the receipts and payments for each project to see where things were at.  Once he looked at each project, Ivan found that:

• Two of the five projects had been “overbilled” and there was no cash to finish the remainder of the project. Another project had “borrowed” funds from these two projects.  They needed to be repaid.
• Some projects were over budget because supervisors were making changes the customers requested but were not within the original scope of work.
• One project had not been billed for a stage of completion that was performed well over two months ago.
• Cash from the advanced billings had not been set aside “in trust” and this led to cash shortages. This sometimes left supervisors without the financial support they needed to buy materials, increasing project delays and keeping that money later in the payment cycle further from the company’s reach.
• Pricing anticipated a 12% margin which did not allow for good cash flow since 10% of billings were always held back.

Systematically, Ivan addressed each issue but first created a forward-looking cash flow plan to present to lenders and investors to secure more funds.  Then he put in better processes to control costs and manage changes.  He recommended changes in pricing to earn better margins.  Now the company uses their project outlook tool to always anticipate materials and labour and make sure that building was not delayed because of financial management missteps.