Construction Industry Best Practices For Financial Strength

Jul 1, 2021 | Profit Improvement

The construction companies that are the most profitable right now are succeeding because they have made it a point to push financial understanding down to the field level. Keep reading for construction industry best practices for financial growth – first among is training the team to be financially in tune with how the the company operates.

Four concepts for better financial strength

Construction is a fascinating and confounding process all at the same time. When done well things run smoothly and seem so simple, but there are so many places for processes, budgets, scope and relationships to go astray that having a strong financial leader to help focus is important. There are four essential concepts for developing better financial strength inside a construction company:

  1. Training operations team members to understand finance
  2. Make sure you are measuring those things that means the most to the business’s success
  3. Work smarter, not harder
  4. Risk Management

Let’s explore each of these more closely.

Training construction company operations team members to understand finance

It’s crucial that everybody, from leadership down to field employees, understand your company’s finances and their importance to revenue and profitability. The reason: margin. Especially for general contractors, the construction industry typically operates on low margins. One small mistake on a large contract can wipe out profit. Instead of being disciplined with margin management, some companies resort to cutting corners or making low-cost labor choices that ultimately can damage the customer relationship.

Teaching the basics of finance, like revenue, committed costs, variable costs and profit, helps everybody make smarter decisions. Understanding and practicing against percent of completion and its impact on earned revenue and profit are essential.

Your CFO should take the lead in developing training, from executives down, that help everybody in the organization better understand and consider the basics of finance in how they do their jobs.

Measuring what’s meaningful

Having key performance indicators (KPI’s) and important metrics available at a glance helps leaders and others make informed decisions and better understand the real-time financial health of the company. They also empower you to make proactive decisions rather than reactive choices. Some key metrics we recommend you adopt and study:

  • 13 week rolling cash forecast
  • Backlog and work in progress
  • Completed contracts
  • Committed costs
  • Unapproved change orders
  • Labor productivity
  • Cost in Excess of Billing (asset) /Billing in excess of cost (Liability)

If you’re not measuring any of these, it’s time to start. If you’re measuring some, make a plan for execution on the others. Again, your CFO should take a leading position in helping you create and report on KPI’s.

Work smarter, not harder

Construction is sometimes thought of as an archaic business. The adage work smarter and not harder is definitely applicable to the construction industry in general. Let’s explore some financial techniques and tools that can be used to make a firm more modern and productive.

  • Use software or apps that help create estimates on the front end to provide faster and more accurate estimate of costs to develop bids, down to the hour or square foot.
  • Utilize cloud-based project management to streamline the interaction of field to office operations including field connectivity for sharing daily field reports, project drawings and time management.
  • Establish and stay disciplined to a predictable, repeatable change order management process. This will help you avoid margin fade.
  • Using prefabrication to reduce completion risk and time
  • Automate processes to help draw process sticking to deadlines, submissions formats and field approval for completed work.

Risk Management for Construction Companies

Finally, let’s talk a little about risk management for contractors. Some of these factors include:

  • Subcontractor risk management, like applying lien waivers, COIs and understanding completed contract risk
  • Contract management should include a change in material pricing provision
  • Pre-start due diligence – confirm project financing is in place by either talking with the title company or lender providing the financing for larger projects
  • Employ a backup lender, bonding and insurance companies to mitigate the risk of change in underwriting from the primary service provider
  • Prequalify subcontractors – determine they have the right experience, financial strength, team, equipment, etc.

The construction industry can be challenging, but it’s also generally recession proof. As such, it is inherently competitive which drives down profitability. Having a team that understands financial impact of decisions, measures and tracks the key items for success, works smarter harder and mitigates risk will create a culture of sustained success. Be sure to empower your CFO to help manage these aspects to help your company develop better financial strength and ultimately achieve more growth.

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