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Construction business owners are used to challenging market conditions. Construction is a challenging enterprise even when conditions are favorable. It takes more than cookie-cutter financial strategies to keep a construction business profitable – with or without supply chain uncertainty, tariff chaos, and labor shortages.
With disruptions including fluctuating material costs, change orders, late material delivery, and rising interest rates, construction businesses need real-time visibility into profitability more than ever.
While demand is mixed, construction businesses are navigating issues like high borrowing costs, slow payments, and a softer market for commercial construction starts.
Strategic long-term thinking under such conditions can feel like an investment in time and effort that you don’t have, but there are benefits to thinking beyond short-term issues. Some strategies become even more valuable when margins are tight. Here are examples of four things you can do to improve your financial resilience.
1. Improve Cash Flow Management
Solid cash flow management processes can be a matter of survival for small and mid-sized construction companies that must constantly calibrate draws and deposits against labor and material costs.
Accurate estimating and change order management processes protect your profit margins and ensure you have the cash flow you need to prevent errors that can bring projects to a halt. Don’t risk being forced to personally finance operations and material purchases because a customer draw was badly timed or underbilled.
Better cash flow management can help you create a schedule that ensures customer draws are available to purchase materials and maintain balanced cash flow from start to finish.
Best practices include:
- Cash flow management at the project level
- Draw schedules built on predetermined dates or milestones
- Over/under billing analysis to maintain positive cash flow, plan for increases in material costs, taxes and labor, and impose a timeline that keeps you on budget.
Tracking project performance is also recommended, along with the difference between estimated and actual final project costs. This will help you determine if your estimating processes need improvement or if client change orders are creating cash flow issues. It’s extra work, but it can significantly improve budgeting accuracy, help cover overhead, and ensure profitability.
2. Improve Quoting & Change Order Processing
Effective estimating and change order management protect your profit margins from unexpected increases in material costs and uncompensated job changes.
Though construction project bidding can be as much of an art as a science, reliable monthly accounting practices provide the foundation of real-time data on the profitability and health of your business. Analyzing data by project, season, client, or any other relevant slice of the picture offers visibility you can use for more accurate forecasting, pricing, and equipment and material purchasing. It’s also a valuable source of insight for better decision-making. When your financials are up to date and properly accrued, you have the financial clarity you need to analyze job profitability and gaps in your estimating and change orders process.
3. Invest in Your Team
With the ongoing shortage of labor facing the construction industry, investing in your workforce, which is a good idea in any case, is a strategy that pays even bigger dividends.
Internal training programs help to retain promising employees and grow your next generation of leaders, while also aiding your recruitment efforts. You may also be able to take advantage of federal tax benefits that allow you to deduct costs of job-related education, supplies and travel.
Other ways to retain skilled workers include providing comprehensive healthcare and pay-related benefits and ensuring that opportunities for advancement are well communicated. Investing in your team’s growth and job satisfaction can go a lot further than simply filling positions. It’s a way to build the skilled, committed workforce you need to drive your business forward.
4. Partner with a CPA Firm with Construction Industry Experience
Don’t trust your accounting needs to a firm without solid construction industry experience. From change orders to bidding to fixed-contract budgeting, construction industry accounting and financial strategies differ from those of other businesses and require diligent, unerring practices.
Look for an experienced partner who can provide the full range of services and support you will need at every stage of your business lifecycle, including accounting, financial and business advisory services, as well as tax planning, preparation, filing, advisory and consulting services, and even fractional CFO outsourcing services.
