Healthy cash flow in construction depends on efficient and accurate payment processes
The UK construction industry is highly fragmented – in fact, the average project has 70 subcontract packages. This means, on average, 50-75% of a project’s cost is dispersed throughout the supply chain. As a result, the payment processes underpinning relationships between clients, contractors and subcontractors are key to project success – and business health.
However, many construction businesses – SMEs in particular – may be suffering the effects of poor payment processes. Are you one of them?
Here are 5 signs your business is at risk because of payment processes.
Are suppliers taking a long time to get quotes to you? Maybe you’re seeing more requests for upfront payments, or finding that prices are inflated from tenders because suppliers expect you to pay late. Or maybe they’re even delaying supply to your site, slowing down production.
One thing guaranteed to have suppliers dragging their heels is for you to be constantly late with payments. If you’re missing the due date time after time, there may be underlying cash flow and process issues you need to address.
Does this scenario sound familiar?
While on a site visit, Carl the Client asks Sam the Subbie to add a couple of extra general power outlets, which Sam does in good faith. Sam submits an application to Bill the Builder. Bill’s not aware of the extra work because neither Carl nor Sam told him. Bill’s reluctant to pay until Carl confirms, but Carl’s memory is hazy. Plus, if he knew it was going to cost extra, he never would have asked!
And that’s just one example. There’s also the hassle associated with certifying applications and reconciling them with contracts.
Situations like these involve lots of calls, emails, faxes and spreadsheets. They cost time, peace of mind and goodwill. And they affect your ability to recruit staff and subcontractors – and deliver projects on time and budget.
When accounts staff are constantly being hassled (or even abused) over payment misunderstandings, both stress levels and employee turnover can go through the roof. The overall tone around the water cooler is negative, people aren’t working at peak productivity, and you may find it harder to retain and recruit staff.
You need to give accounts staff processes and tools that make their lives easier. Less faff means fewer misunderstandings and less time spent on credit control, leading to more efficient payment processing, better cash flow on your construction project and a happier workplace.
When you rely on paper to process applications for payment, you introduce two key risks.
First of all, you’re wasting resource. Think about the time staff spend on payment-related admin. It’s not just the time it takes to enter data into your systems. There’s also the time wasted certifying applications (how often does stuff get lost in the project manager’s in-tray?). There’s the time wasted chasing sufficient detail because applications and contracts aren’t reconciling. And there’s the time wasted arguing over numbers.
That’s a lot of waste.
Add to that the second risk: the fact we’re only human, and manual, paper-based processes are more prone to error. Which leads to more wasted time and, importantly, incorrect payments.
You need to mitigate these risks by introducing more digitisation and automation. More efficiency and more accuracy make it easier to manage projects and the business’s cash flow.
There’s no point increasing sales if you don’t have the resources to fulfil the extra orders. If you’re constantly plagued by cash flow worries, you can easily end up having to pass up opportunities, like investing in new equipment.
Poor cash flow also affects your credit rating and the interest rates you can secure, which in turn affects your ability to finance projects and win business. At the extreme end, this can lead to insolvency. (And we don’t want to go there.)
There’s a theme running through all 5 signs: issues around confusing, fragmented, missing and/or inaccurate documentation.
Issues around documentation delay application submission and approval. They slow down production. And they create more work for subcontractors, as well as the managers and accounts staff responsible for credit control, certification and financial monitoring.
To solve these issues, you need to digitise, automate and collaborate.
When you eliminate manual processes, digitising and automating as much as possible, it’s easy to make and chase payments on time. It’s easy to certify and agree subcontractor applications. Which means it’s easy to keep your staff, subcontractors and clients happier – and it’s easier for you to maintain a healthy cash flow in your construction business.
The result: everyone in the supply chain wins.