Building Industry Magazine - November 2011 - (Page 10)

BestPractices CASH FLOW: The Oxygen of Business BY GARRETT SULLIVAN 2. Understand Your Medication: Read the Small Print Read your contract carefully. An enormous amount of risk can be transferred to you as a GC/subcontractor when you indemnify owners, architects or engineers. Understand whether you are agreeing to buy insurance prior to signing the contract – not afterwards. Make certain that the final contract mirrors the actual cost of your bid. Hidden extras can wipe out your profit – and possibly your whole business. 3. Vaccinate Against Disease: Collect Payment ASAP For that all-important first invoice, draft it well ahead of time to shake out any delays. Be a savvy contractor and front load your invoice. Your accounting department must act quickly to gather the required documents (e.g., an approved schedule of values, lien releases from suppliers, tax and union clearances, etc.) Also, require your project managers/engineers to report quantities early and judiciously manage change orders. Tie this to their compensation. These “minor tasks” can waste days or weeks when your accounting department is still learning the process. Once the first invoice is ready, hand deliver it. 4. Have a Nebulizer: Establish a Rainy Day Fund In order to be ready for the next possible “asthma attack,” maintain a rainy day fund. Regularly set aside cash, typically in a money market or certificate of deposit, for emergencies. I recommend at least six months’ operating expenses. Avoid the temptation to divert “extra” cash into a salary bonus (and waste it on a boat or lavish vacation). This is not extra money. It is your lifeline. 5. Store Up Antibiotics: Establish a Line of Credit All contractors should have a line of credit at the highest possible limit. This allows you to survive the unexpected peaks and troughs of contracting payment cycles. Even if you don’t need it, use your line of credit at least once a year so your banker knows you will pay it back responsibly. Increase the limit each year because this will be nearly impossible to accomplish when you need cash the very most – during a crisis. In summary, successful contractors realize they are a business first and a construction company second. All best-in-class contractors take the above steps, and as a result, have average net earnings of 6.5 percent before taxes, according to the 2010 Construction Financial Management Association Annual Survey. All others average just 3.5 percent. Cash will always be king in business, and a prudent contractor will always monitor cash flow to ensure optimum health. BI For additional tips in the full, unedited version of this article, go to www.SullivanHi.com. Garrett Sullivan is the president of Sullivan & Associates, Inc., a construction industry consultancy. Reach him at GSullivan@ SullivanHi.com or (808) 478-2564. Just as an asthmatic can think of nothing but oxygen during an attack, your business fights for breath when cash runs low. We all know what happens when a person goes without oxygen for too long. The same is true of any contractor when their financial “oxygen” is cut off. Even if your jobs are all making a profit, you can still run out of cash. Cash flow and profitability are different financial measurements. Below are some tips to keep your cash – and oxygen – flowing: 1. Protect Your Immune System: Prepare the Right Bid Positive cash flow starts with your bid proposal. State the amount of retention you are willing to accept. If you are bonding the project, request zero retention. The most you should negotiate is 5 percent with a clause to lower it to 2.5 percent when half of the job is completed. If you’re a subcontractor, mirror the general contractor’s (GC) retention. If your work starts at the beginning of a long job, insist on being paid 45 days after the owner has paid the GC for your work. This saves you from waiting until the job is finished – and chasing a GC who has no urgency to close the project. Require your bid to be attached to the subcontract as an exhibit and that it take precedence over conflicting terms. Include a termination date. One possibility is to use the next labor wage increase date to allow you to negotiate the higher costs should the project be delayed. 10 | BUILDING INDUSTRY | NOVEMBER 2011 http://www.SullivanHi.com

Table of Contents for the Digital Edition of Building Industry Magazine - November 2011

Cover
Contents
Datebook
Kapolei Low-Income Housing Poised to Start
Construction Starts for Habitat Project
Kahi Mohala Renovation Blessed
AIA Hosts Sixth Canstruction Competition
Best Practices
East Oahu Residential Project Breaks Ground
Contracts Awarded
Maui FEATURE
Concept to Completion: CVS/Longs Kapolei Distribution Center
Construction Equipment - FEATURE
Inside the BIA FEATURE
Continued Success for PBTE
Spotlight on Success: CACTF, Kahuku Training Area
Low Bids
Steel FEATURE
News MakerS
New Products

Building Industry Magazine - November 2011