Managing roofing projects involves various tools and techniques to oversee them. Many tools have changed with the advances in methods and technologies. Cash, however, is the one constant tool that contractors will continue to rely on. While cash is not necessarily actual dollar bills and coins, a positive flow of money into the bank is essential to the financial health of contractors.
The lack of cash flow is likely the most common reason for contractor failures. Contractors who report profits and have a good reputation for quality work may still have financial difficulties if they are not paid on time and do not have a positive cash flow.
Each roofing job is seen as an individual revenue base and contractors rely on roofing projects to bring in cash in the form of monthly payments from clients. Cash flow should not be just the focus of your CFO or Controller: it should be a priority and the primary focus of everyone from the owner down to the project team.
The concept of cash flow has several elements, most of them included in the broad concept of cash outflow and cash inflow. Jobsite expenditures, including labor, material, equipment, subcontractors and indirect costs, have a negative impact on cash flow and require tracking. The only significant positive cash flow is revenue received from the client. Contractors always want to operate in the black; that is, to make their cash inflow greater than their outflow. There are various methods a contractor can use to improve their cash position, some of which we will discuss in this article.
Preparing a cash flow curve for a roofing project is vital to managing costs and ensuring positive cash flow. The cash flow curve is a projection of the total value of work to be completed each month during the project’s construction. The curve is created by
cost-loading the schedule and plotting total monthly expenditures.
To create the cash flow curve, the estimator or project manager must develop a cost-loaded schedule, starting with a summary schedule and estimate. The activities on both schedules should be similar and not be overly detailed for clarity and ease of use.
Construction-specific accounting software should make preparing a cash flow by job report easy, if not automatic. Some systems even incorporate this report into their executive dashboards, so the information is displayed graphically and available in real-time.
Tracking job costs is one of the most time-consuming but essential aspects of cost control for a roofing project. Direct labor costs are tracked by filling out time sheets for the crew, which report hours worked against a description of work activities and cost codes assigned to those activities. Direct material costs are tracked by recording material deliveries and matching them with supplier invoices, with the appropriate cost code assigned to those materials.
Subcontractor invoices are submitted to the roofing contractor and logged as accounts payable before being forwarded to the project manager for approval. Your accounting team should verify that the total amount billed does not exceed the amount approved in each contract and assign the appropriate cost code for each subcontractor. The project manager or superintendent should verify the percentage completed for each subcontractor request.
The cost of jobsite general conditions includes indirect expenses such as equipment rental and labor costs not directly associated with job-specific costs. Indirect labor expenses include salaries for personnel such as superintendents, project managers and other supervisory personnel.
Salaried personnel, including the project manager, superintendent and other supervisory personnel, may not be required to complete time sheets like crew leaders do for their crews. If your company tracks these to projects rather than general overhead, they are individually assigned to a different cost code within the project’s general conditions estimate. The
company routinely records a portion of its monthly salary against its individual cost code, which is incorporated into the labor and job cost history reports.
There is only one source of positive cash influx for a roofing contractor: receipt of payment from the client. This usually occurs once a month, after the work has been done. Residential contractors and some commercial contractors on private reroofing projects often receive a check at the time of sale or mobilization of the project.
The CFO or Controller is responsible for processing cash flow to make payments on all jobsite expenditures and receiving monthly client payments. The company relies on positive cash flow when revenues exceed expenses. The CFO or Controller may have an established line of credit with their bank and may call on those funds in case of a short-term cash shortfall but pays them back as soon as possible. Still, your goal should be to finance your projects from a solid cash flow position that keeps additional cash for times when you may need to cover expenditures. The contractor usually pays direct and sub-labor weekly and does not withhold retention from the worker’s checks. Revenues typically lag expenditures early in the project when an increased amount of direct labor and material is expended to mobilize and start the project. Later in the project, cash flow needs are eased during the punch-out and close-out phases.
The lack of positive cash flow is one of the most common reasons for contractor bankruptcy. Contractors continually relying on the bank to fund their operations will fail. Negotiate terms with clients and subcontractors to improve cash flow, prepare timely,
accurate and fair pay requests and obtain financing.
Below are some methods you can incorporate for cash flow improvement within your company:
■ As a subcontractor, you finance the general contractor in that you are not paid until the client pays the general contractor and retention is withheld from your payment; the same as what the client withholds from the general contractor. You can significantly improve your cash flow position by incorporating a lower mix of general contracting work and more privately negotiated reroof projects.
■ Include a mobilization charge in the schedule of values; this should be standard practice.
■ Require the client to make a down payment or invoice the client twice monthly. You must negotiate this into your contract, but the answer will always be no unless you ask.
■ Negotiate retention withheld from 10 to 5 percent.
■ Request retention released on portions of the work completed and accepted. This is also done during contract negotiation.
■ Have a solid estimating practice in place. By doing so, you will beat the budget or have significantly fewer overruns and performed work will cost less, considerably improving the cash flow position.
■ Most clients and general contractors understand that roofing contractors are not banks and will allow a small amount of front-loading of the schedule of values, just not an excessive amount.
In conclusion, cash flow management is crucial to the success of any roofing project. The lack of positive cash flow can lead to financial difficulties and even contractor failures. It is essential to track job costs and prepare a cash flow curve for each project to manage costs effectively and ensure positive cash flow. By incorporating these methods and prioritizing cash flow management, roofing contractors can maintain financial health and achieve success in their projects and business.
John Kenney, CPRC has over 50 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. If you would like any further information on
this or another subject, you can contact John at jkenney@cotneyconsulting.com.
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