Everything costs more right now, from lumber to labor. In some areas, costs are so high, they’re outrunning construction bids and pushing hard-at-work firms into the red.
Since prices are up across the board, construction firms don’t have any sweet spots (or lofty margins) to lean on. And materials aren’t just expensive, they’re hard to find and challenging to deliver on time. Many construction firms are stuck in cycles of uncertainty each time they open a bid: What will materials cost? When will they arrive? Will there be enough workers, at the right times?
Cash is king
It takes money to make money. Construction firms need cash on-hand to mobilize projects and teams at exactly the right times. Otherwise, they risk falling behind and setting off a series of costly delays.
Many firms received stimulus funding that is helping them stay afloat as the economy rebalances. That cash is king — and key to finding more stable ground. Use these six strategies to hold down costs and increase cash flow:
- Renegotiate: “Business as usual” is long gone, so some of your business practices might need to be, too. Make sure your terms and conditions are serving your firm’s needs, right now. Negotiate for reimbursement policies that pay for materials upfront, or at least earlier in the project. Likewise, ask for longer payment terms with suppliers. Spread out the costs of bigger purchases, or finance at a low rate. Try to get as much cash in the door as quickly as possible, and hold onto it as long as possible.
- Make it easier to bill and collect: Stay on top of billing processes and remove barriers, even if they seem like simple tasks (e.g., printing and mailing invoices or depositing checks at the bank). Digital invoices go out faster, and electronic payments help cash come in quicker.
- Shop around: Explore new vendors and sources, especially if you haven’t shopped around in a while. Local vendors may be more competitive now, since freight and transportation costs have risen, or more predictable for scheduling.
- Plan big: Try to combine companywide orders and buy in bulk to negotiate better pricing. If warehouse space is available, you can stock up on commonly used materials when prices are good. Warehousing can also help firms avoid scheduling delays, should availability change.
- Manage small: Company-level performance is important, but right now, firms need to dial it in. Create projections for every project, and try to get each one cash-flow positive (without robbing one to pay the other). For every project, make sure you understand how much money is going out and coming in, and when. There will be dips. Plan for them. And, stay on top of change orders. Micro-managing the financials of every project will help the company avoid cash flow drains — or at least spot and manage them sooner.
- Stay informed: The amount and speed of change is staggering. Make sure someone — either a senior leader or a trusted business advisor — is reviewing stimulus programs, tax credits and lending changes to see if you qualify for opportunities or relief.
Managing costs is top-of-mind right now, but the benefits will outlast this pricing crisis. Some costs aren’t likely to decline, and the industry hasn’t hit the peak of its labor crisis yet.
Sure, everyone is doing “more with less.” But firms cannot continually delay building value, waiting for better times. Every firm can take steps, even small ones, to increase cash flow and build stability.
How Wipfli can help
Wipfli can help you tackle rising costs. Our professionals specialize in business strategy, labor planning and tax services specifically for construction and real estate firms. Together, we can build a better future.
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In the next article in our series on tackling disruption in the construction industry, we’ll cover how to tackle the tight labor market.