Best Practices for the Construction Industry

Contractors have had their hands full trying to weather the economic downturn. Regardless of your company’s current financial health, you may be able to benefit from implementing construction industry best practices.

Always Analyze Bidding Risk

Before submitting a bid on a project, take the time to examine carefully how the project will affect your firm’s financial resources, liability exposure, personnel levels and scheduling needs. You should always:

• Look into the prospect’s payment history. 
• Project cash flows to identify the jobs that could impact your firm’s liquidity. If you anticipate cash flow problems, start negotiating favorable terms with your suppliers in advance.
• Review your staffing levels. Do you have enough people to handle the project you are bidding on? The ability of your project manager to deal with personnel constraints very often dictates the success or failure of specific projects.
• Make sure you have the systems and procedures in place to monitor activity at the job site if the project is outside your normal area of operations. Address problems immediately--before they escalate.
• Examine the construction contract and specifications carefully. Pay particular attention to the potential for change orders. If the potential is great, revise your overall project estimates based on anticipated change orders.

By following these steps, you will increase the likelihood that you will bid only on jobs that have a high probability of delivering the profit margins you require.

Focus on Financial Management

Staying on top of your company’s financial position is another industry best practice that’s worth focusing on. Start by tracking your debt levels. High levels of debt should serve as a red flag since, if you are overleveraged, you may have trouble repaying debt without diverting working capital away from current projects.

Always keep track of capital expenditures. New equipment is likely a significant expense. So before committing to a purchase, you need to analyze your upcoming cash flow needs and the financing options that are available. Also consider how financing the purchase could affect your ability to obtain credit for other needs.

Managing your payables is also critically important. Take advantage of favorable creditor payment terms and time your payments to conserve cash. If you don’t already do so, use electronic funds transfer to make payments on the last day they are due. Review vendor discounts for early payment and take advantage of terms that are favorable to you.

Know the payment terms outlined in your contracts. Don’t delay issuing invoices, and provide required supporting documentation promptly. Contact customers as soon as you detect any delays in payment and stay on top of accounts that are past due.

Keep Close Track of Productivity

Receiving weekly productivity reports helps project managers manage their jobs in the most efficient and cost-effective way. Paying attention to every phase of a project on an ongoing basis is a critical element in maximizing productivity. Schedule pre-job meetings in which you have project managers and foremen identify and examine potential trouble spots. Make everyone aware of your profitability targets for the project and of any incentives that will be available for hitting those targets.

When the job is underway, keep a close eye on costs. Any time a project is running over budget, take steps to locate the sources of the cost overruns and take measures to get costs back on track. Look out for bottlenecks that might delay your completion date. If you identify any, deal with them immediately.

At the project’s conclusion, meet with your supervisors to review the project. If the project came in on time and under budget, identify the factors that contributed to this positive result. If the project lost money, determine where the problems occurred and how you would address similar problems in the future.

Somerset Can Help

Implementing these construction industry best practices can help your company cope with today’s tough business climate. If you feel that your company could benefit from a review of your current financial controls and operations, please contact us.