Construction is an inherently capital-intensive industry because the land, equipment, labor, and material are expensive. You may need to spend a fortune on projects, even if you only build for clients. Running a lean and financially-sound company is the best way to stay afloat and eventually unlock growth for your business. You must find ways to save money, improve cash flow, increase margins, and operate more efficiently. It can be a lot of work, considering the complexity of projects and the sheer size of capital you require to get off the mark and run your business. Here is some valuable financial advice that new construction contractors can rely on.
Bill ahead of costs
Project costs can be painful as they pile up over time and grow enough to press your budgets. The best way to prevent overburdening your budgets is by avoiding using your own funding or a line of credit for the entire project. Consider billing ahead of costs with front-loaded contracts to receive higher payments earlier. You have less to worry about as the client takes on a higher risk with this strategy.
Rework payment terms
Another savvy money tip for new contractors is to rework their payment terms with clients. Establish a payment schedule that follows the percentage of completion of projects. Create a clear agreement with clauses requiring the client to make timely payments to meet readily identifiable milestones throughout the project’s progress. Ensure they are on the same page regarding the terms and schedules.
Manage disruption risks
As you take up projects, you will realize the inherent risks they may come with. For example, you may encounter a problem if a subcontractor does not complete their job on time or according to client specifications. Fortunately, you can cover the risk with a fastbond, so it should surely be on your checklist every time you start working on a construction project. Having coverage keeps you stress-free because you can deal with the financial implications of failed projects.
Consider leasing or financing equipment
Construction equipment is perhaps the largest expense for a contractor, and newbies can feel stressed about the bill. But you cannot run your business without equipment. Consider taking a middle path by leasing or financing equipment instead of buying it. The approach enables you to retain your working capital and distribute the equipment cost over the years. You have more cash in hand to invest in other growth initiatives.
Manage material costs
Although the rising cost of building materials is a given, you can manage its impact on your projects and business. Start by minimizing procurement or purchase costs by optimizing quantities and timelines. You can also strengthen your relationships with suppliers as it enables you to seek hefty discounts down the line. Also, avoid overstocking material because it can cause wastage later. Likewise, ensure timely delivery because running out of stock can cause work disruption.
Money-savvy construction contractors are in a better place to survive and thrive in the industry. You can follow these financial tips to stay ahead of your growth and profitability goals.