Profitable jobs, tight cash: the construction owner's problem

Property & Construction

A construction business can report profitable jobs while running short of cash because labour, materials and other costs are paid before project receipts arrive. Variations, disputed claims and retentions can extend that gap. The useful question is how much cash is needed to complete the work already underway.

For an owner managing several jobs, the pressure can remain hidden while new projects are starting. Deposits and early receipts improve the bank balance, even as existing work still requires substantial spending.

The next project should be assessed against that existing commitment.

Put cost to complete beside the margin

A job report is much more useful when it shows the expected cost of finishing the work, as well as costs recorded to date.

Include committed purchases and subcontractor work that has been ordered but not yet invoiced. Ask the project manager about remaining labour, delays, rework and changes to the original scope.

Keep the estimate current. A margin based on the original tender can become less informative as the job develops.

The government's construction industry guidance brings together financial and regulatory considerations for the sector. For day-to-day management, a consistent project review helps turn those obligations and commitments into numbers the owner can use.

Separate four stages of a variation

Work requested, work priced, work approved and money collected should not be treated as one event.

A variation may be commercially justified yet still lack the documentation needed for a prompt claim. It may also create costs before payment is resolved.

Keep a register that shows the current status, supporting documents, responsible person and next action. Ask your solicitor or contract adviser about the rights and requirements under the particular contract and applicable law.

The financial forecast should reflect the uncertainty. Including the full value of every proposed variation as near-term cash can make a difficult position look comfortable.

Follow the payment sequence for each job

Map the next labour and supplier payments against the expected timing of claims and receipts. Show retentions separately so money held back is not assumed to be available for ordinary operations.

Use actual experience of the approval and collection process. An invoice date is not the same as a likely receipt date.

A hypothetical job illustrates the point. Suppose A$120,000 of labour and materials must be paid before the next A$150,000 receipt is expected. The immediate funding need is A$120,000, less any cash already available for the job. The larger future receipt does not pay this week's bills. This simplified example excludes tax and other overheads.

Review the timing with your finance team and project managers together. Each holds information the other needs.

Bring the jobs into one business forecast

Project reports need to connect to the business's wider commitments: wages, superannuation, insurance, rent, equipment finance, tax and owner payments.

A rolling short-term forecast can reveal weeks when several jobs require cash at the same time. The government's cash flow statement guidance explains how forecast receipts and payments can identify shortages.

Test a plausible delay on the largest expected receipt. Then consider the effect of a cost increase on the job with the least remaining margin.

This is also the moment to examine available finance, its conditions and the assets or guarantees supporting it. A facility should be understood before the business relies on drawing it.

Make the next tender earn its place

Revenue growth is not sufficient evidence that the next job is right for the business.

Compare the expected return with the cash required, the delivery capacity and the risk already carried across current projects. A job that starts at the wrong point in the cash cycle may place disproportionate pressure on the whole business.

It may be better to negotiate a different start date, clarify commercial terms or decline work that cannot be funded sensibly. Those decisions are easier with a forecast that shows the constraint clearly.

For the owner, the question extends beyond the company. Additional debt or guarantees can increase the exposure of the family's wider financial position. Discuss the implications before making the commitment.

When to seek help

If the business is struggling to pay debts when due, obtain prompt accounting and legal advice. Do not assume a full pipeline will resolve the position. ASIC explains directors' responsibilities in its guidance on preventing insolvent trading.

Does a profitable job always generate positive cash? Over its full life it may, but timing, collection risk, cost changes and overheads can change the outcome. Profitability and cash availability need separate review.

Should we use a new deposit to cover existing commitments? Consider the contract, applicable law and the business's ability to fund all remaining work. Do not treat a new receipt as evidence that earlier funding gaps have disappeared.

If margins look reasonable but cash remains uncomfortable, talk to EFS. We can bring business advisory and finance advice together around project commitments, funding and the owner's wider position.

General information only. Seek financial and legal advice for your contracts, payment rights and circumstances.

Speak with our team

For advice on your circumstances, speak with Paul Connolly or Richard Moon.

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