Last month, we began a discussion of cash flow: the flow of money into and out of a project. We concluded that a positive project cash flow is critical to the success and survival of the company. On the other hand, a negative cash flow at the project level is costly to the company and could eventually lead to financial failure. Though some elements of cash flow management are outside the control of the field supervisor, many things the field supervisor does can have a significant impact on the cash flow of the project, either positive or negative.

Cash flow is negatively impacted when money is invested in the project but cannot be recovered in a timely fashion. If the field supervisor underreports units of work completed during a billing cycle, the company is not paid for the work that has been completed, and the company will end up subsidizing the job. On the other hand, if the units installed are overreported (more units are claimed for the period than were actually completed), the owner is likely to discover this error and stop payment for the period, which will have a significant negative impact on the cash flow. Therefore, accurate reporting of completed units is important.

Cash flow also is negatively affected when money is invested in the project at a higher rate than estimated. When craft labor works below the productivity level on which a company has estimated and proposed, the payment—which is based on the original estimate—will be inadequate. The result is a negative cash flow. If, on the other hand, craft labor works faster than estimated, actual costs to the company are lower, meaning the company makes more money than it anticipated, and the cash flow becomes positive.

Change-order work can be dangerous. If the work is not completed and reported in a timely manner, the result is a negative cash flow. Also in change-order work, if all costs associated with the change are not reported, the contractor ends up paying out of pocket for unreported costs. For example, the field supervisor might record time actually spent on the change work but forget having to reassign workers. Reassignment affects productivity, as there are fewer crewmembers working on the job the company actually was hired to complete. The field supervisor also might neglect to recognize the cost of special handling for the small quantities of materials used in a change or the inefficiencies of doing small pieces of work. The result is negative cash flow, requiring more money to be spent on change units than is actually recovered. Change-order work complicates things, and supervisors must account for everything.

Of course, tools are vital. Without tools, workers cannot work. When field operations are in full swing, the supervisor should consider keeping extra tools and equipment handy in case of breakdowns or in case another crew can be reassigned to a task requiring special equipment. However, company-owned tools that are not in use may prevent crews on other projects from progressing. This can cost the company money, so the supervisor also must consider the company’s work outside a single project.

Then there are materials. If materials are ordered and delivered at the end of the pay cycle, they can be billed for immediately. If they are ordered after a pay cycle, they cannot be billed until the end of the next pay cycle, requiring the company to subsidize the purchase of the materials for an extra three or four weeks.

One of the biggest cash flow problems comes from slow close-out of a project. As projects move toward conclusion and owner occupancy is achieved, work tends to slow down. The substantial completion date has been met, so why rush to complete the few outstanding punch items that remain? Unfortunately, until the job is fully completed and all resources have been reassigned, there continues to be a negative cash flow in terms of both labor and supervision. Stringing out final closeout of the project retains assets on the old job that could be invested in a new project, and until the job is complete, the owner holds all or a most of the retention.

Cash flow is a game of “whose bank is the money in.” Until the money is in your company’s bank, your company will experience a negative cash flow associated with the cost of that money.

These are only a few ways field operations impact project cash flow. As the supervisor works to eliminate needless spending or looks for ways to improve the timeliness of the work, many other opportunities for improving the cash flow on the project may arise.

Next month, we will complete this three-part series by considering positive steps the supervisor can take to improve the project cash flow.

ROUNDS is the AGC endowed chair and professor of civil engineering at the University of New Mexico. E-mail him at [email protected]. SEGNER is a professor of construction science at Texas A&M University. Contact him at [email protected].