The Importance of a Financial Lending Option for Cash Flow for Your Construction Company

In the world of construction, managing cash flow is an intricate balancing act that requires precision, foresight, and effective financial strategies. In this episode of Pro-Accel, hosts Jerry Aliberti and Travis Mayor continued their insightful discussion on the importance of financial lending options for cash flow management. They delved into the nuances of borrowing money, understanding the real costs involved, and the strategies to effectively bake these costs into project bids.

The Necessity of Cash Flow Planning

Cash flow is the lifeblood of any construction project. As Jerry Aliberti highlights, whether managing estimating or project management, understanding cash flow requirements from the outset is crucial. Construction projects, especially those worth hundreds of millions of dollars, often require significant upfront investment before any cash flows in. Mobilizing resources, purchasing materials, and staffing all demand capital that isn't recouped until well into the project timeline.

Jerry elaborates that typically, cash flow doesn't start for the first six to seven months of a project. This places a substantial financial burden on contractors who must fund these initial phases out of pocket or through borrowed capital. The importance of accurate cash flow charts and projections cannot be overstated, as they guide contractors on how much to borrow and when to expect payments.

The Cost of Borrowing

One of the biggest misconceptions in construction finance is viewing all debt as negative. As Jerry emphasizes, borrowing money isn't inherently bad; rather, it can be a strategic move to ensure project completion and business growth. He notes that the cost of borrowing — which can range between 15% to 30% depending on the source — needs to be baked into project bids.

Accurately calculating and including the cost of capital in bids ensures contractors aren't caught off guard by unexpected expenses later. Travis Mayor adds that regardless of whether the capital comes from personal funds, lines of credit, or alternative financing, the cost of capital is always higher when unplanned. Proactively managing your capital stack is much more cost-effective than reactive solutions.

Strategic Financial Practices

Travis underscores several strategic financial practices that can help contractors manage their cash flow more effectively. Questions such as, "How do I build my schedule of values?" or "How can I negotiate favorable payment terms?" are essential. He points out that many subcontractors and even general contractors overlook these strategies, leading to thin margins and tight cash flows.

For example, negotiating reduced retainage or billing for retainage at 50% completion are tactics that can significantly improve cash flow management. Contractors should also be prepared for potential delays that can disrupt their forecasts, as Travis explains through scenarios where unexpected project delays led to a cascading effect on cash flow and operational resources.

Mitigating Risks and Ensuring Sustainability

The construction industry is fraught with risks, and even well-established businesses can go bankrupt on short notice due to cash flow issues. Jerry mentions a client facing potential cash flow problems because multiple projects are poised to start simultaneously in the fall. Without sufficient cash reserves or strategic borrowing, such a scenario can lead to operational disruption.

Jerry and Travis both emphasize the importance of understanding leveraged debt and viewing it as "good debt." Properly leveraged, debt can help contractors mobilize resources, start projects on time, and maintain steady cash flow. Even large, globally recognized contractors routinely borrow money to manage their projects effectively.

The Bigger Picture: ROI and Competitive Advantage

Including the cost of capital in project bids isn't just about covering expenses; it's part of a broader strategy to ensure a return on investment (ROI) and maintain a competitive edge. Travis shares insights from an annual subcontractor market report that revealed those who incorporate financing costs into their budgeting tend to achieve higher net margins.

This isn't merely about adding a cost line item; it's about integrating financial practices that enhance efficiency, streamline operations, and create value. Leveraging borrowed capital to invest in new technologies, equipment, or more skilled labor can lead to significant gains in competitive advantage.

Effectively managing cash flow through strategic financial lending is essential for construction success. As Jerry and Travis discuss, borrowing isn't a sign of weakness but a strategic tool that, when used correctly, ensures project success and business growth. By understanding and including the real costs of capital in bids and adopting proactive financial practices, contractors can overcome cash flow challenges and thrive in the competitive construction landscape.