Breaking the Cashflow Crunch Cycle in Construction

We asked attendees at our recent Cashflow Clarity webinar how far ahead they could see their cash. About half said two to four weeks. Only 10% could see three months or more. Asked to rate their own system out of 10, the room landed on a 5.

Cash flow is a symptom, not the cause. Whatever creates the gap is usually decided months before the gap shows up in the bank account.

Cashflow follows decisions made months earlier

Cash flow is a byproduct of decisions made upstream, and the lag between the decision and the consequence is what makes the cause hard to see.

• Estimating sets the profit a job is expected to return. A cost missed, or a rate underquoted, means the profit assumed at estimate stage is overstated, and the shortfall does not surface until the job is well underway.
• Pricing sets the ceiling on what a job can return. On a build delivered 15 months after the price is fixed, a 3% movement in material and labour costs is absorbed out of the margin unless the contract carries an escalation allowance.
• Scheduling determines when a claim can be raised. When jobs overlap and crews are stretched across them, the claim moves with the programme.
• Claiming drives when a completed stage becomes revenue. Invoicing the moment a stage is signed off, and communicating clearly and regularly with the client on progress, is what keeps the claim moving rather than waiting on paperwork.
• Overheads typically rise in step with turnover as a business grows, and extra overhead is easy to justify at that point. That overhead is funded out of the profit the growth was meant to deliver, and each addition further reduces the final net profit position.
• Tax, GST and superannuation fall due on known dates. Under Payday Super, superannuation is payable at the same time as wages rather than quarterly, so those amounts now leave the account much closer to when they are incurred.

Why the problem is sharper in construction

In most industries the work is done and the invoice follows. Construction contracts are prescriptive about when a claim can be made and how much can be claimed. Under a standard progress claim regime, a stage that is 99% complete supports no claim at all, even though the subbies, wages and plant hire on that stage have already been paid.

Add rain, a late building approval or a council delay, and the programme shifts. Across ten concurrent jobs, those shifts combine into a tight cash period that no single decision caused.

Profit is not cash

Profit measures the value created on a job as it is completed. Cash measures what has actually landed in the account. In construction, progress claims mean these two figures move apart further, and for longer, than in a business paid as soon as work is invoiced. A job can be tracking to plan on paper while the bank balance tells a different story, because a cost or a claim recognised in this month’s numbers does not necessarily turn into cash this month.

A modelled example makes the mechanism clear: a job runs into a $100,000 cost overrun in June. The P&L takes the full hit that month, because that is when the cost is recognised. The cash effect is different: the overrun is absorbed through subcontractor payments and reduced progress claims across July, August and September, with September absorbing the most.

The critical number behind the profit figure is a job’s work in progress (WIP) position: the value of work completed on every live job but not yet invoiced or paid. A well-constructed WIP position gives an accurate profit number, because it captures value earned rather than value banked. WIP is not cash at bank. Reading profit as cash means planning around money that has not arrived yet, and on a job where the claim lags completion by weeks, that gap can run into real money.

What a reliable forecast needs underneath it

A forecast gives financial clarity. It shows the actual cash flow position, rather than the one assumed from the bank balance on any given day, and that visibility is what creates the chance to fix the position over time, before a tight period takes hold instead of after it has arrived.

A forecast is only as good as the data it sits on. Five things need to be in place before a forecast is worth building:

• The P&L and balance sheet are reconciled soon after month end rather than three months later.
• Costs and revenue are allocated job by job.
• WIP and retentions are current.
• Every live job carries a forecast cost to complete.
• A monthly review asks why each number moved.

Two forecasting tools

A 13-week cashflow is a good entry point where forecasting is not already in place. It maps the opening balance, total receivables and payables week by week across every job, together with the regular operating expenses, and places ATO and superannuation payments in the weeks they actually leave the account. A standard Xero cash flow report shows what has already happened; a 13 week cashflow projects what is coming. The point is to build a clear picture of the cash position over the next 13 weeks, so there is a chance to make changes in time to close any gap before it arrives.

A three-way forecast brings the P&L, balance sheet and cash position together across 12 months. As a business scales, a three-way forecast becomes critical to understanding its full financial position, and an accurate three-way forecast also helps model major decisions, moving them from guesswork to scenario planning grounded in real data. Whether the business can carry a supervisor at $150,000 with no additional work won is a question a three-way forecast answers, rather than one the bank balance answers three months later. We build these forecasts with clients in our reporting tool, Xact Clarity, which pulls job data from job management software such as Wunderbuild, Buildxact or Buildertrend, as well as the full suite of accounting data from Xero.

If cash is tight right now

Pricing with a genuine escalation allowance and tracking margin job by job address cash flow at the source, over the long term. Where a business is in a genuine cash flow crisis, more immediate action is also worth considering. The options worth weighing up are:

• Talking to suppliers and subbies early about payment timing.
• Asking clients whether claims can be brought forward. Finishing the job with the current builder is cheaper for a client than replacing the builder.
• Reviewing overheads against current turnover, to catch any that have run ahead of it.
• Selling equipment that gets used once a quarter and hiring it when the job needs it.
• Approaching the ATO about a payment plan while the debt is still current.
• Taking on smaller tuck-in work that turns over quickly.
• Contributing personal funds in extreme cases, where the business cannot otherwise meet its obligations.
• Engaging the whole team around closing out a job sooner so the progress claim can go in faster, often through incentives that share some of the upside of finishing sooner.

Those measures buy time without addressing why the time was needed in the first place. The underlying fix sits further upstream: pricing that carries a genuine escalation allowance, and margin tracked job by job rather than only at the end of the job, both reduce how often a business finds itself reaching for these options again.

Watch the full session

Both forecasting models are walked through in full in the recording: Cashflow Clarity for Construction Businesses: Breaking the Cashflow Crunch Cycle.

To work through your own cash flow visibility, book a conversation with us.