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There have been more electrical contractors forced into liquidation through poor cash flow than through lack of profits, many new contractors are astounded that they have run out of cash and cannot continue to trade even when their debtor’s ledger is showing a healthy profit. The inability to get the money in on a timely basis may require the company to draw on their reserves – if they have any. Net cash flow is the difference between the inflow and outflow within a given period.
Managing cash flow is vital to a successful project and the Project Manager (PM) plays an important role in forecasting and monitoring the cash flow on the project by wise planning, carefully monitoring the sequence of work and paying particular attention to the project schedule. The initial planning starts at the tendering stage, when the estimator ensures that the materials can be delivered within the time frame and that the labour force is available, however, it is the PM’s responsibility to ensure that the program stays on track.
The cash flow is negatively impacted financially when materials and / or labour is provided to the project but cannot be recovered in the current progress claim invoicing cycle because the PM did not convey the relevant details to the company’s administration department.
Planning is essential, especially for those items of materials which need to be manufactured such as lighting fittings and switchboards. Day one the PM should be obtaining accurate delivery dates from the manufacturers and agreement on:
- Finalised construction schedule (builder)
- Site access (builder)
- Date shop drawings complete (manufacturer)
- Drawing approval turn around time (architect/client)
- Date samples complete (manufacturer)
- Date of delivery (manufacturer)
- Storage facility (builder)
- Lifting / carnage availability (builder)
It is crucial the PM has the finalised construction schedule to be able to plan the delivery and installation within the time frame and an early problem arises when a major manufactured item has a longer completion time than the construction schedule has allowed. i.e. a main switchboard which has a manufacturing time of 12 weeks, plus design / shop drawing time of 1 week and the construction schedule has only a 10 week window for completion. Can the PM:
- Have the construction schedule extended. (builder)
- Have the construction schedule changed to delay the building of the switch-room, leave a wall or slab until later (builder)
- Arrange for overtime to be worked to reduce the fabrication time (manufacturer)
Monitoring the sequence of work is where the cash flow is most vulnerable; it is the PM’s responsibility to be constantly looking ahead and assessing when materials and labour will be required in accordance with the progress of the job and the construction schedule.
A typical example is when the contract states “Progress claims shall be submitted by 25th of the month and the payment made 21 days after the first of the month”. The PM has ordered the 4 X 240mm mains cable and the 400 KVA stand by generator and both deliveries arrived on the 28th of the month and both are 30 day accounts and the PM has to bring an additional 10 electricians on site to install these materials. Now the next claim will have an additional $60K which will not be due to be paid until the 21st of the following month and the company will have a cash deficit of a minimum of $75K (including unplanned labour) for almost a month, the result being the electrical contractor partially funding the project.
If the PM is diligently monitoring the progress of the project, it will be obvious when the major costs will be incurred and steps will be taken to cover them. In the case of the scenario above, the smart PM would anticipate these major items and include them in the previous month’s progress claim and arrange for delivery for the first of the month OR make arrangements for an extraordinary payment for these specific items.
Ensure the hiring of specialised equipment is kept to a minimum, many projects “go sour” through the inability of the PM to maximise the use for the minimum of time and leave hire costs accumulating when the equipment is not being utilised.
Practical completion is another crucial time for the PM when the pressure slackens off and there is not the same urgency to meet completion dates but the expenses are still being incurred and the labour component tends to become less productive. A diligent PM will reassign resources as soon as possible to curb a negative cash flow. Many projects have depleted their estimated profit during the period between the practical completion and final completion and the PM must be diligent to minimise any excess labour and equipment as soon as possible.
Variations have caused many electrical contractors liquidity problems with costs of material and labour creeping up and the claim for payment left until the end of the project, once again the electrical contractor is funding the project and therefore it is important that the PM obtains speedy approval in order to include these variations in the monthly claim. The other unseen costs occurring with variations are the reassignment of workers which has an impact on productivity, a disruption to the main installation and a tendency to record the labour hours and forget the materials and equipment costs involved.
It is the responsibility of the PM to maximise the profitability of the project and good management of resources and cash flow will make a significant difference to the project profit.
Brian Seymour MBE, industry consultant, author of “Electrical Estimator’s Labour Unit Manual” and “Starting Out”, conducts regular industry training programs throughout Australia on behalf of the Electrical & Air-conditioning industries