In any business, delivering positive outcomes for clients is critical.
The building sector is no exception. Good practices on site are what any construction enterprise should be about.
This translates into commercial success, however, only when financial aspects of the business are effectively managed.
In its December 2015 report, the Senate Inquiry into Construction Industry Insolvency talked of a ‘culture of non-payment’ and an imbalance in commercial relationships. These, it said, were contributing factors behind the sector having a rate of insolvency which was disproportionate relative to the value of its economic output.
Yet a critical aspect of commercial viability revolves around effective financial management and control. Whereas a retail store might have regular cash flow, construction businesses have multiple projects operating simultaneously and fluctuations in incomings and outgoings which need to be managed.
Peter Donovan, general manager of building industry software provider Bizprac, says many builders are proficient at the technical aspects of construction but fall down when it comes to financial management. Buildings are complex products which involve multiple outlays, and where builders are not careful, they find themselves paying out more money than what they bring in. Many also fail to take adequate account of overhead costs such as vehicle leasing, phone expenses, electricity and office space.
Whilst it can be easy enough to manage when the volume of work is smaller, many struggle when this is scaled up to 60, 80 or 100 jobs per year, Donovan says. Often, these people lose control over where their money is going, inflows and outflows, and what their cash flow position will be like going forward.
“A lot of the business owners who are going broke are good at their trade,” Donovan said. “They are good at building houses or multi-storey buildings. They are just not good at the discipline of managing the business and the money side.”
According to Donovan, contractors have several misconceptions about financial control.
First, he says, delivering good work will guarantee business success in and of itself. Instead, on-site performance must be accompanied by proactive management and forward planning of revenue, expenses and cash flow.
Second, he says responsibility for financial control can be delegated to employees. Whilst many employees can handle bookkeeping tasks such as invoicing, payments and profit and loss reporting, financial management incorporates more than this and involves forward planning as well as company-wide analysis of revenue, profit and cash flow, Donovan says.
Contractors, he says, need to manage their business strategically as well as dealing with operational responsibilities.
As for traditional accounting reports, Donovan points out that these are historic reports rather than forward looking management tools. By the time a problem shows up in these reports, he says it is often too late to act. A contractor building 80 homes a year needs clarity about how much they are going to be paid and when as well as whether or not there will be cost blowouts on any jobs.
When undertaking financial control, Donovan says too many builders rely on spreadsheets as opposed to industry software packages. Whereas many spreadsheets are well set up, he said these are limited in that they do not ‘talk’ or interface with other software functions or programs.
Around any job, he says industry software groups expenses, invoicing areas, costs and income into one place. Thus contractors are able to pull up that job and see all of the variations, invoices and up-to-date expenses as well as the projected profit. It enables them to track budget figures against actuals and ensure that their jobs are on track or take corrective action if this is not the case.
Finally, Donovan stresses the need for enforcement of contractual rights. Work associated with any variations, for example, should not commence until the variation in question has been signed off on. Contractors who are not getting paid, meanwhile, should stop work.
Often, he says, contractors continue working for months upon verbal assurances of payment and find themselves having incurred significant expense on work for which they do not get paid when the client or head contractor becomes insolvent.
“They have to be really tight on the money,” Donovan says.
“If they are not getting paid, they need to stop work and stop their costs immediately. Even if they have been friends (with the client or head contractor) for the past 15 years, it’s a business. You cannot afford to put your family and your household at risk because someone else is trying to keep their business afloat.
“As soon as you are not paid, you need to stop work, demand cash and look hard at how you are going to get paid if you work for these people in the future.”