Stop leaving money on the table—take advantage of these cash-saving opportunities.
Construction firms often leave money at the jobsite—not a pile of cash, but they lose money in indirect ways. For instance, they may fail to collect their utility and telephone deposits from a construction site after completing a job.
Trailers at jobsites require electricity and telephone service, both of which require a deposit, and construction firms pay these utility bills but often leave the deposits behind.
The left-behind money—typically between $500 to $1,500—may not seem significant considering a project may run from thousands to millions of dollars. But this money adds up, considering how many construction projects take place in a year.
In addition to reclaiming deposits, construction firms can improve their financial outlook and project profitability through other methods.
Renegotiate Credit Lines
Financial institutions want to retain and recruit new clients with financing needs such as construction firms. You should renegotiate your line of credit and/or shop around for better rates. Typically, banks renew lines of credit yearly. Considering recent changes in the banking industry, be sure a professional reviews the contract.
If your business took advantage of a teaser rate last year, this might not be available anymore. Also, keep in mind that many banks will be changing terms and adding new requirements, such as equity thresholds, working capital provisions, cleanup provisions or an accounts receivable turnover.
Eliminate Change Order Write-Downs
It will be difficult to eliminate change orders completely, but you can at least lessen the amount of write-downs associated with them. To do this, you must document the changes in a timely manner. Change orders require internal controls and processes to ensure that the handshake agreement between the firm’s foreman and the client’s project manager has been communicated through the chain of command on both sides. Without this, change orders could create thousands of dollars in additional fees.
In the best-case scenario, these fees typically go unpaid for months while the construction firm and client debate the causes and costs. In a worst-case scenario, both sides have to meet and negotiate an acceptable price that cuts into the construction firm’s profitability. You cannot process change orders and push them through after the fact. Like most bills, the older they get, the harder they will be to collect.
Create a Purchasing Department
At many construction firms, purchasing falls under the administrative function. Having a purchasing department (one person or a team of people dedicated to this function) could mean thousands of dollars in additional realized revenue—and more satisfied clients—over the course of each year. Having at least one employee dedicated to the purchasing function could create savings to pay for the business owner’s salary while providing other benefits.
An active purchasing department motivated to save the firm and its clients as much money as possible without sacrificing quality will work much harder to not only get the best deal but also the best payment terms and delivery dates. This enhances jobsite productivity, and more importantly, it allows for enhanced cash flow.
Aside from the financial benefits, a strong purchasing department includes a system of internal controls to ensure the firm has procedures and policies in place to request bids for supplies and materials and properly bill the client. It may even be as simple as checking purchase orders upfront against actual estimates and the invoice.
Win Business with Incentive-Based Bids
Many construction firms market themselves as “on time and under budget,” but they do little to back up this claim. They could instead use an incentive-based bid to win business. This innovative but risky practice enhances profitability by responding to bids with a combination of fees and incentive-based bonuses. It allows construction firms to beat their competitors’ prices, and it also gives them an opportunity to make up the difference—and then some—in bonuses.
Incentive-based methods can be a win-win for the construction firm and client, especially when dealing with a commercial project such as an office building or retail space. A job done ahead of schedule means more money-making opportunities for the client.