Archive for January, 2014

Cash Flow Management > A Key Driver of Contractor Success

One of the biggest challenges for contractors is CASH FLOW management.  You can make an accounting profit and still get wiped out.  This can happen in any economic climate, but is a particularly acute problem in a down market when competitive pressure is severe.  The recent prolonged slump in the construction industry stretched the financial capacity of even the best of contractors and subcontractors.
Subcontractors are often at risk for cash flow imbalances because they at lower rungs of the contracting ladder, at least two-to-three levels removed from the money.  In a tight market, the cost of money can be squeezed out via the bidding process, increasing the risk that late cash receipts will erode profitability.
 
There are steps you can take to ensure that cash flow has visibility within your organization and is a priority for your project teams.
1.  Be sure that mobilization requirements are clearly spelled out in your contract.
2.  Find out if the GC or CM you work for has an imprest account for job start-up.
3.  Review the payment clause(s) in your contract.  Generally, CM contracts stipulate a “pay-when-paid” requirement.  If this is the case, see if you can negotiate better terms.  Check the payment requirement laws in your area and be cognizant of them.
4.  Make sure that retention is managed properly.  Push to have the retention reduced at the mid-way point in the project. For example, from 10% to 5%.  This must be clearly delineated in your contract.
5.  Be aware of prompt payment terms, which are often required in government-funded projects.  Know the requirements of the agency administering the project, and verify that these terms have been included in your contract.
6.  Tie-in executive and project management compensation to cash flow stability.  This is an effective method of conveying the importance of cash flow within your organization, and leads to proactive cash flow management.
7.  Timely cash flow, like most elements of effective project management, derives from proper project management, communication and documentation. Update your project schedule monthly and demand that it is issued with a narrative that explains how the critical path has changed!
8.  Change orders, if improperly administered, can bury a subcontractor.  Again, it comes down to proper communication, documentation and follow-up. Payments for change orders can be negotiated and should be part of the agreement.
9.  Know your contracts inside-out and understand the pitfalls and opportunities inherent in your agreements.
10.Final payment problems usually result from quality issues at the end the project.  These can stem from extensive punch lists, poorly administered permitting processes, disorganized close-out and TCO issues.  Implement a standard process for managing close-out and be sure to communicate this to your team and to your client.  Remember that well executed job close-out is a process.  It does not start during the end of the project.  Rather, it is the result of sound project management practices and effective project communication and controls.
Be aware that cash flow is as important as profitability.  Evaluate the diversity of your cash flow against your ability to access cash, either via savings or from credit lines.  Be sure that your contract agreements clearly address payment terms.  Communicate these terms to your project managers and to your executives.  Remember that Cash is King in the construction industry.

– Mark Harari, Co-President, phb Catalyst, Inc.

Preparing for and Administering a Time-Impact (Schedule) Claim

Preparing for and Administering a Time-Impact Claim

Preparing an effective schedule claim requires diligence, preparation, communication, documentation and pro-active project management. If the contract is not administered properly from the onset of the project, a successful time-impact claim is highly unlikely.

Generally, the burden of proof is on the contractor.  You cannot demonstrate that your schedule has been impacted if you do not have a clear and viable baseline schedule.

Here are some basic steps involved in tracking and demonstrating schedule variances:

  • Establish a logical baseline schedule before the start of the project.  Ensure that it ties into your job estimate.
  • Verify that the baseline schedule has been communicated and included in your contract.
  • Document your assumptions.
  • If you are the prime contractor (CM or GC), be sure to include the baseline schedule in your subcontract agreements.
  • Specific task activities should be clearly defined.
  • Keep the schedule current.
  • When updating the schedule status, be sure to verify the logic of your assumptions.
  • Do not override the logic of the schedule; this will only increase risk and reduce the credibility of your schedule and any time-impact claim(s).
  • Submit updated schedules with a critical path analysis at least monthly (or periodically as needed).
  • Each activity should have a unique owner (source) of responsibility.
  • Activities should be descriptive: Object / Action / Location
  • Use the Critical Path Method (CPM) to manage the project.
  • Bar charts are only used as a summary tool after the CPM has been constructed.

Time Evaluation Concepts

The critical path is the longest sequence of activities in the schedule, and therefore, activities on the critical path have zero float.  This is an important concept.  If you deplete the float in an activity, by definition, it will fall on the critical path.  Thus, the critical path is dynamic and can change, especially on a large and complex project.  As a project manager, you must recognize the tendency of the critical path to change and be ready to document how it changed and who or what caused the change.  Also, the CPM schedule must be presented prospectively, i.e., it should be based on the best information currently available and on project assumptions that have been verified.

Include external interfaces and owner-supplied information and deliverables.  Remember that the CPM should represent all of the scope of the contract.

When preparing a time-impact analysis for a claim, you can show the progression of the schedule up to the point of the delay event and use “BUT FOR” analysis.  This entails showing how the schedule deviated from plan, and how it would have progressed IF the delay event had not happened.  Also, verify that all activities which you include in your delay claim were “critical” at the time the delay occurred.  If there were non-critical activities which lost their float because of the delay, and were forced to become “critical”, demonstrate this using the schedule history as back-up.

Effective schedule management and time analysis requires attention to detail and a project management team that communicates and documents changes.  Often, large changes are the result of small changes that the project team views as being minor.  The lesson is that even small schedule changes should be documented and communicated, so that the schedule (and the project) does become a victim of “death by a thousand cuts”.

– Mark Harari, Co-President, phb Catalyst, Inc.