Published August 4, 2023 . 3 mins read

1. Unpredictable Payments

Construction payment schedules often hinge upon a chain of events that can cause significant unpredictability. The common ‘paid-when-paid’ practice means that contractors and subcontractors might not receive payments until their client has been paid, adding an extra degree of uncertainty.

Additionally, the payment release process often involves a long series of approvals and paperwork, further delaying receipt of funds. To add to the complexity, the inherent volatility of construction schedules, due to unforeseen circumstances like weather conditions or supply chain issues, can cause frequent changes in the projected payment dates. This amalgamation of factors often results in unpredictable cash inflows, making efficient cash flow management a herculean task.

3. Retention

The practice of retention presents another significant cash flow challenge in the construction industry. This is where a portion of the contractor’s payment (usually between 5-10%) is held back until the end of the project to ensure completion and satisfaction of work.

While retention can serve as a safety net for project owners, it places a substantial burden on contractors and subcontractors. This is primarily because they have to fund the ongoing operations, including labor, materials, and equipment, with a reduced cash inflow. In many cases, the retention amount may be held until several months after project completion, pending final inspections or resolution of any potential disputes. This delay in receiving the full payment for the job can significantly squeeze the cash flow, particularly for smaller firms or those operating on thin margins.

The 13-Week Cash Flow Forecast: A Powerful Tool

Given these unique challenges, the importance of effective cash flow management in the construction industry cannot be overstated. This is where the 13-week cash flow forecast comes into play.

A 13-week cash flow forecast provides a detailed weekly overview of expected cash inflows and outflows over the next quarter. This time frame is long enough to help identify potential shortfalls and provide sufficient time for corrective actions, yet short enough to provide detailed, actionable data.

Here are the key benefits of a 13-week cash flow forecast:

1. Visibility: It offers a granular view of your weekly cash flow, helping you understand exactly when and where your cash is coming in and going out. This can help pinpoint potential issues before they turn into bigger problems.
2. Management of Cash Shortfalls: By projecting your cash flow three months out, you can anticipate potential shortfalls and make arrangements to bridge the gap, whether through delayed expenditures, negotiating longer payment terms, or securing additional funding.
3. Strategic Decision-Making: With a detailed understanding of your near-term cash position, you can make informed decisions about taking on new projects, making capital investments, or hiring additional staff.
4. Improved Relationships with Stakeholders: Accurate cash flow forecasting enhances confidence among your stakeholders, be it your suppliers, creditors, or employees. When they know that you can meet your financial obligations, it strengthens your business relationships and builds trust.