The construction industry’s constant challenges – cash flow and profitability

The construction industry is a low-margin industry where liquidity or profitability problems are not unusual. As a builder, you often end up with large sums for UE and material purchases, and with small margins, it doesn’t take much before the account starts to echo empty. A dispute over a larger variation, a client who goes bankrupt or a setback in the construction industry can be enough to knock even well-run companies off their feet.

The same problem applies to profitability, where you often add up the projects with a decent margin, but where the profit report in the financial statements still does not meet expectations. What is it that makes you not have more left over at the end of the year?

So what can you do to minimize liquidity problems and improve profitability? You’ll find a number of pointers below:

1. Partial invoicing of ongoing work

Avoid being caught short and left to chase the client over the final invoice by implementing partial invoicing. One way is to settle with the customer to invoice accrued costs periodically, for example every week or bimonthly. The important thing is that your account is kept afloat by a constant water-wheel of smaller payments. Man som använder ett slipverktyg.

With time sheets, paper invoices and Excel sheets, partial invoicing has historically been complicated, and with manual procedures it is also unfortunately easy to miss or double charge costs. With a modern system support such as Next Project, the risk of this type of mistake is basically zero.  Hours, invoices, machines and picking from cars, warehouses and storage are entered digitally  and are automatically approved and checked off as invoiced. What used to take hours to sort out now takes minutes. Quote from a Next customer: “Because I hated sitting down at the computer and invoicing, now it’s pure pleasure.”  It cannot be said better.

2. Set up a payment plan for tender jobs

For all forms of fixed-price jobs, you should consider whether to include a payment plan in the agreement. You may be able to invoice the smallest jobs at the end of the project. But as soon as the amounts are larger, you should set up a payment plan. It gives you the right to withdraw parts of the amount as construction progresses. The payment plan should be linked to clear milestones in the project, for example: “Foundation and slab completed” or “Framework remaining”. Please make sure to think a little “forward” when you choose your payment plan. In other words, make sure that early activities have good financial coverage. This means that you have a little margin in the cash register during the journey.

The above applies regardless of whether you work for a commercial client or a private client. But when it comes to private customers, it is especially important to be clear about what the payment plan means and that it is part of the contract that you draw up. All with the aim of avoiding misunderstandings and disputes.

3. Bill for EVERYTHING

If you are used to working with ongoing commitments, you know that costs in the form of supplier invoices are never a problem to capture. Once an invoice has landed on the project, it is there. Working time comes via a traditional time sheet or via a mobile app. But since these almost always also constitute salary basis, these costs also usually, sooner or later, end up in Builder the project. Rather, the problem is all other “internal” project costs where documentation is often missing or possibly only found as sloppy and illegible notes in a time or daily report. Picks from warehouses, service vehicles, storage equipment, own machines or transport equipment therefore have a tendency to slip through the fingers and never land on the invoice.

With a mobile tool, this becomes much easier. In Next Project you will find a function that we call the “favorite list” which is connected to  the time reporting . It functions as a checklist that automatically appears when you save your daily time and means that your own materials, machines and daily equipment suddenly come along. It is not at all certain that these internal costs will be invoiced further, but you still want to know, even internal material/equipment and machines mean a cost to the project.

Every £ counts and a simple calculation example where a company with 20 people increases the debit by an average of £5/person per day gives an increased income on an annual basis of approx. £26,000; that amount ends up on the last line of your income statement. Not so crazy, right?

4. Streamline your supplier invoice flow

The question is whether the pile of supplier invoices has not historically been the most hated pile of paper on the desk. Many companies have therefore switched to digital invoice management and we can guarantee that none of these have chosen to go back to manual paper invoices.

The Next e-invoice module   is directly integrated into Next. This means that the invoice lands with the right project manager and with the right account right from the start. If everything looks correct, it’s just a click to approve, and then the invoice falls on to both accounting and onto the right project in Next. If all or parts of the invoice belong to a variation, you also resolve this directly when you approve it in Next e-Invoice – a supplier invoice only needs to be handled once.

5. Keep track of the variations

How much fun is it to come afterwards with hat in hand and ask for additional payment for variations that are poorly documented and reported too late? Do you get paid in full? No, you almost never get that, inadequate and late reporting of variations is one of the reasons for the low margins in the industry. With a modern and  digital tool, you can  document deviations and variations in real time , often with a complementary photo. The matter can then be immediately reported to the customer, who may decide and possibly approve the work. Correct documentation presented to the customer at the right time means you get paid for work done. It’s that simple.

Order and order in the variations journal is one of the single most important points for maintaining the profitability of the project and this applies regardless of the size of the company, the size of the project and the type of business you conduct – builders, installers or land and developers, everyone has the same challenge and opportunity here.

6. Maintain health and well-being

“The big difference is that everything comes in automatically, hours, diary entries, EoTs and invoices which I was always behind on”. So goes a classic quote from an early Next customer. What this change means for the opportunities for profitability and growth is one thing. But the question is whether the improving mood for the entrepreneur is not even more important.

The allure of the construction industry largely consists of the constantly new projects. No two weeks are the same and it is almost impossible to get bored. The flip side of the coin is that it is difficult to have control over a constantly changing business. Projects, resource needs and necessary planning are constantly changing, and you feel that you are always behind. Add to that the initial challenges in terms of liquidity and long-term profitability. This often creates a stress that can affect both sleep and health.

Many entrepreneurs in the construction industry are guaranteed to recognize the description above, and this is where we at Next feel the greatest pride. With daily monitoring of the situation, less worry and less stress follow, and we simply make our customers feel better. The fact that it also allows the company to grow and increase profitability is in some sense icing on the cake. Health comes first!

Book a demo of Next Project

At Next, we’re passionate about turning wasted work into dollars and cents with the knowledge that you have full control over your day-to-day operations. Book a demo  today and we’ll tell you more!