This article has been selected on by AfiTaC because of its interest for the readers of this blog. 

Negative cash flow probably causes more construction companies to run into financial trouble (leading to their closure) than any other cause.

Even a profitable construction project can cause a company financial problems if the cash flow is negative.

Negative cash flow is when the construction company is paying money to suppliers, equipment hire companies and subcontractors, or in wages and salaries, before the client has paid for the work that has been completed.

Unfortunately most construction projects are usually cash negative to some extent. Many clients hold 10% cash retention until the end of the project when this is reduced by half. Consequently if the project is tendered at anything less than a 10% profit the project is usually cash negative until the end.

In addition, most clients only pay the contractor thirty days after the contractor submits an invoice. These invoices are normally submitted at the end of each month. Many contractors pay their workers fortnightly or in some cases weekly. This could mean the contractor has paid out up to seven weeks of wages before the client pays for the work that these personnel have completed. Smaller contractors sometimes have to pay suppliers before they will release materials.

What Makes Cash Flow Even Worse?

There are, however, a number of other factors that make the cash flow situation even worse:

  • Many construction projects have payment terms longer than thirty days.
  • In addition some clients habitually pay progress claims late or not in full.
  • Of course, the ultimate knockout blow for many construction companies is when clients don’t pay at all. This could be a result of the client disputing the value of work, defaulting on the contract or going into liquidation.

Yet, even with the odds stacked against construction companies, they often make their cash flow situations worse by submitting their progress valuations late, accepting payments late or not claiming fully for completed work.

How To Improve Cash Flow Situation

To improve the cash flow situation construction companies must submit their monthly progress valuations on or before the due date. Some clients only run progress payments on a particular day in the week, or month, so missing a submission date could cause the client to delay payment by up to a month. The valuations must be submitted in the required format and with the required supporting documentation since many clients will use any excuse to delay or reject a monthly claim.

It’s important to track the progress of the payment through the client’s payment system. With major clients there may be several people that check and approve the valuation and payment. Sometimes, the process is disrupted when someone is absent, or the claim simply gets ‘lost’. I’ve had more than one client who consistently paid progress claims late, always with some excuse about our valuation being late, the claim being incorrect (either arithmetic errors, insufficient supporting documentation or disagreement with our progress) and people in the approval process being absent. Of course many of these problems were only reported to us when the payment was due, despite the client having had the claim for thirty days.

Some contracts are structured such that payments are only made when the contractor achieves particular milestones. It’s important that Project Managers understand what these milestones entail and ensure they are met. It’s obviously pointless to achieve 99% completion if payment is only made for 100%. Often contractors take several weeks to complete the last few items (which may just be completing documentation), which delays payment.

Click here to learn about the negotiation of the payment terms.

About the source

Written by Paul Netscher the author of the acclaimed books ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’.

Both books are available in paperback and e-book from Amazon and other retail outlets. This article is adapted from information included in these books. To read more visit http://www.pn-projectmanagement.com )

About AfiTaC

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “info@afitac.com”. 


Jan Bouckaert

Jan Bouckaert is a FIDIC Certified Adjudicator (President's list) with 25 years of worldwide experience in negotiation of complex construction, renewable energy, power and infrastructure projects. He is also specialized in contract management, project controls and alternative dispute resolution. During Jan’s career path, he lived in France, Belgium, Egypt, India and Portugal and worked for GE Renewable Energy, Alstom Hydro, Besix/Six Construct. He is a Civil Engineer from the University of Leuven (Belgium) and has an MBA from ISEG (Portugal). He speaks fluently English, French, Portuguese and Dutch. Jan is the founder of AfiTaC, a company giving advice on international tenders and contracts., and Managing Director of Proove SAS. Be welcome to connect on LinkedIn: https://www.linkedin.com/in/afitac/

6 Comments

Project Negotiation, practical tips for negotiating payment terms - AfiTaC.com · 18 March 2019 at 14 h 40 min

[…] Times are hard for Contractors, especially when it comes to cash. Since the last financial crisis, Contractors are struggling to get cash neutral (or even exposure neutral) payment terms. This will enable the Contractor to finance its ongoing business activities automatically without running to the banks. […]

Négociation de Projets, conseils pratiques pour négocier les modalités de paiement - AfiTaC.com · 19 March 2019 at 8 h 23 min

[…] Les temps sont durs pour les entrepreneurs, surtout quand il s’agit de liquidités. Depuis la dernière crise financière, les entrepreneurs se démènent pour obtenir des modalités de paiement neutres sur le plan des liquidités (ou même de l’exposition). Cela permettra à l’entrepreneur de financer automatiquement ses activités opérationnelles courantes sans devoir faire appel aux banques. […]

Projectonderhandelingen, praktische tips voor het onderhandelen over betalingsvoorwaarden. - AfiTaC.com · 19 March 2019 at 22 h 50 min

[…] De tijden zijn moeilijk voor aannemers, vooral als het gaat om cash. Sinds de laatste financiële crisis doen de aannemers moeite om cashneutrale (of zelfs exposure neutrale) betalingsvoorwaarden te krijgen. Dit stelt de aannemer in staat om zijn lopende bedrijfsactiviteiten automatisch te financieren zonder naar de banken te moeten lopen. […]

Negociação de projetos, dicas para negociar os termos de pagamento - AfiTaC.com · 27 March 2019 at 2 h 31 min

[…] Os tempos são difíceis para os Empreiteiros, especialmente quando se trata de dinheiro. Desde a última crise financeira, os empreiteiros estão lutando para obter condições de pagamento neutras em termos de cash (ou mesmo neutras em termos de exposição). Isto permitirá ao Empreiteiro financiar automaticamente as suas atividades comerciais sem recorrer aos bancos. […]

Tips For Construction Contractors to Get Paid On Time - AfiTaC · 15 October 2019 at 17 h 25 min

[…] This article on Contractors to get paid on time has kindly been made available to our blog by Paul Netscher. Previously, Paul had also published on negative cash flow for construction companies. […]

Blog on contracts, "AfiTaC.com", new status after 6 more months - AfiTaC · 27 November 2019 at 23 h 00 min

[…] You may also contact us to become a guest blogger. We have already benefited from contributions from Jean-Charles Savornin, “Contract Management: are contracts cast in stone?“, and Paul Netscher , “Negative cash flow for construction companies“. […]

Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *