CETS

Negative cash flow, Poor reputation, making errors when you price a project, Theft and fraud, Over capitalizing the company, employing unsuitable and unqualified people, Taking on risky projects, Working for the wrong client, Buying business without doing proper investigations, Becoming too dependent on a particular customer or market

10 Reasons Why Construction Companies Fail

Having available liquid money

is extremely important for sustaining the operations.

Additional expenses such as interest and penalties, less options when paying others, Tarnished reputation and low morale, Possibility of having to limit / restrict operations, Possibility of selling needed assets, Possibility of bankruptcy

Lack of cash flow will result in negative consequences:

Cash flow

is the total amount of money being transferred into and out of a business, especially as affecting liquidity.

Cash Flow

Basically, it focuses on the transfer of money, cash and equivalent, with their timing, from one party's point of view.

Cash

Keep in mind that we are using the word "____" in loose / broad terms.

Cash flow

It includes any money that can be used, transferred, exchanged, or immediately utilized; no matter what form it is in. Fixed assets are not included

cash flow diagrams

Simply defined as plotting expected money in (income) and money out (expenses) over a timeline.

Lack of proper planning / anticipation of financial commitments and expectations, Lack of / poor risk management, Lack of a contingency plan / funds, Contractor's slow / unorganized processing, billing, and collection of invoices, Failing to read the terms of the contract, Failing to consider / manage own "other expenses"; mainly overhead, Investing high percentage of capital and leaving little liquidity, Disputes with the owner, Issues beyond the control of the contractor :Caused by owner Force majeure

Causes for Cash Flow Problems with Construction Companies

risk management

In the construction industry, conducting _ for every project is a must.

corporate level

However, risk management must be conducted at the _ also, along with the organization's strategic planning in order to balance the overall risk. Hope for the best and prepare for the worst!

Single project level, and corporate level

Construction companies must manage the cash flow at the:

Main office expenses

have to be anticipated; both continuous (salaries, utilities), periodical (taxes, legal fees), and accidental.

The financial risk

must be balanced in the total business for the company / organization

If full payment is received by deadline,

no interest is charged

If paid on time but not in full amount, grace period is

revoked, and interest is calculated from day of purchase

If paid late, even in full, grace period

is revoked, and interest is calculated from day of purchase

Do not forget

late fees!

Pay it cash

No interest, no penalties, and you get to choose insurance terms

Pay installments

Pay interest and penalties (whenever late). Financier selects insurance terms

The lower your credit is

the higher the interest rate will be

The insurance concept: Shifting risk in exchange of a

fixed monetary amount

10%

Retainage: Typically, it is ___ but in large projects it may be reduced to 5% when hitting the project's mid-point

The general contractor (GC)

consolidates all expenses, including those from subcontractors into one invoice and submits it to the owner at the same time of every month (cycle)

Progress payment

This payment request is based on actual quantities performed and unit prices as specified in the schedule of values. It has to be approved by the owner.

The owner

has to reimburse the GC for the amount of that invoice, within certain time, after subtracting any deductions such as retainage and penalties

Retainage (retention), Recovery of advance payment, Recovery of materials purchased (and reimbursed) earlier but not installed, Disputed amounts (until dispute is resolved), Penalties, if any

Owner may deduct the following from progress payments:

The general contractor

usually stays a good part of the project in negative cash flow.

By borrowing from financial institutions, or Using own funds, A combination is possible

The contractor usually covers that either:

The "cost of borrowing"

has to be added even if using own funds (Lost opportunity)

Need to be aware of and watch the

"credit limit"

A detailed (itemized) cost estimate, A detailed schedule, Cost- or resource-loading the schedule, showing the total cost (budget) per activity, Knowing and implementing "other expenses"; mainly overhead

Requirements for Preparing Cash Flow

Overhead expenses

may not be always constant /linear

Schedules

are predictions of future plans. Rarely if ever, things go exactly as planned

This is why updating

the schedule is extremely important

Actual duration, remaining duration, percent complete, cost (resource) this period, cost to complete, cost at completion, Some schedulers focus more on past than future!, Change orders implementation and impact, Any change to completion date, resource availability and cost

Checking all parameters:

Materials management:

A balance between "Just-in time" and "Inventory Buffer" theories

Bid unbalancing, Manipulating cost items, Manipulating the schedule, e.g. sequestering the float, Inaccurate / exaggeration of front-end cost-loading for activities, Flip-flopping on activities percent complete, Hiding trouble issues

TRICKS THAT MUST BE AVOIDED

Government laws and regulations, Local culture / language, Availability and cost of resources, Communications, Currency, Insurance and bonds, What's the "default"? Bureaucracy and Advance payment

INTERNATIONAL WORK ISSUES