You would be surprised how many construction companies set aggressive goals for landing new projects, achieve their goals by winning many of those new projects, only to find that they grew themselves right into a cash crisis. They say "Let's go out and win some new and bigger projects. Everything will get better if we just increase the number and size of the projects we win."
Verne Harnish, in his book Scaling Up, says it beautifully: “Growth sucks cash – the first law of entrepreneurial gravity.”
The reality of business is that growth, especially rapid growth, is almost always a net user of cash. This is especially true in the early stages of a new project.
Fortunately, there is something you can do to improve your cash flow as you grow and land new projects: consider using a mobilization draw at the very beginning of each project.
A mobilization draw is a payment you require from the customer at the time you begin the project. It’s the perfect time to require a draw on the project because it marks the very beginning of your work. It’s the point where you are beginning to deploy assets and people to start the job. Or, stated more directly: it’s the time when you are starting to invest cash in the project.
Mobilization is defined at businessdirectory.com as “activation of a contractor’s physical and manpower resources for transfer to a construction site until the completion of the contract”.
One large state’s Department of Transportation describes mobilization costs on a construction project this way: “includes preparatory work and operations, including, but not limited to, those necessary for the movement of personnel, equipment, supplies and incidentals to the project site, for the establishment of all offices, buildings and other facilities necessary for work, on the project, and for all other work and operations which must be performed or cost incurred prior to beginning work on the various items on the project site.”
Mobilization costs could easily reach 10% of the total contract amount. Of course, the larger the project, the larger the cost – and the larger the negative impact on cash flow.
Smart cash management pays big dividends
A mobilization draw provides cash flow even before your progress billings begin. Without the mobilization draw, the project becomes a drain on cash at the very beginning of the job. It goes cash flow negative from day one. And going cash flow negative hurts your company in a number of different ways, including:
- increasing the chance that you will need to borrow money
- reducing your profit if you end up borrowing money
- increasing risk since you will be carrying a larger receivable for a longer time
- reducing the number of projects you can work on at any given time
- forcing you to use cash that could otherwise be used to grow the company
Accounting can play an important role
Ed Lette and I had the opportunity to present at a cash management seminar put on by the Construction Financial Management Association (CFMA). We had a room full of accounting and finance professionals (as well as business owners and project managers) from across the construction industry, including general contractors, specialty contractors, developers, construction managers, architects, and engineers.
The seminar was focused on cash management and it began by asking this very insightful question:
“Did you know it’s possible for a construction company’s Controller/CFO to generate more profit on a project than the Project Manager?”
I love that statement because it really makes you think about the role accounting and finance (and good planning in general) can play in the success of a construction company. From pre-bid planning, to contract review, to monthly billing and payment schedules, and ultimately to project closeout and collecting the full amount due on the job, good planning can be the difference between success or struggle.
And it all starts with a smart, effective approach to cash management.
Have everyone in your company, whether in accounting, finance, project management, or elsewhere, begin thinking about how mobilization draws could be used in upcoming projects.
It will help you build a stronger business and improve your cash flow.