Commercial and Residential Construction Firms – How Are You Navigating Your Current Financial and Accounting Challenges?

In the ever changing world of commercial and residential construction, companies encounter a spectrum of financial and accounting challenges that can impede their growth and sustainability. From cash flow management to accurate cost estimation and compliance with regulatory standards, construction firms must navigate these issues with greater precision, as these challenges get increasingly complex.

By using effective tactics combined with the understanding as to how these challenges impact your operation, you can better ensure a greater degree of financial success and operating efficiency.

Additionally, by leveraging authoritative insights, construction companies can ensure a competitive edge as robust financials and efficiencies give these firms a wider range of options to pursue more complex work.

Challenges That Can Impede the Success of Your Commercial and Residential Construction Firm 

1. Managing Cash Flow

Cash flow management is pivotal for the seamless (uninterrupted) operation of construction projects. Blackridge Research offers a good explanation of the different types of cash flow – Link Here.

Why This Matters

Fluctuating cash flows can obstruct the procurement of essential materials and hinder payments to subcontractors, thereby disrupting project timelines. Due to the size, scope and the usually long payment cycle of commercial projects, commercial firms must do a better job in managing cash than residential firms. This becomes especially true if commercial firms do not invoice for progress payments. 

Solutions:

• First, create sales and cash expense/expenditures forecasts ⇒
• Then, create a cash budget for the entire operating period ⇒
• The result of the cash budget will indicate the type of financing plan (such as a revolving line of credit), if any, that may be required.
• Employ progress invoicing and invoice for material costs, upfront.

2. Precise Cost Estimation and Reporting

Ensuring precise cost estimations and maintaining comprehensive reporting structures are integral for the financial success of construction projects.

Why This Matters

Misestimations (in the original estimate) or delays as a result of unanticipated technical issues can result in budget overruns and diminished profit margins. 

Solutions:

• Utilize activity based costing methods to capture indirect (Office/SG & A) as well as direct costs based on all activity required to complete the job/project.

3. Regulatory Compliance and Risk Management

Regulatory adherence and effective risk management frameworks are crucial to navigating the legal and financial landscapes of construction.

Why This Matters

Without effective processes and procedures for addressing the changing regulatory landscape, projects are at risk from legal challenges that could create delays or outright cancellations.

Solutions:

• Classify compliance hurdles based on internally-generated standards and dimension job/project risk along factors such as, compliance, financial, and technical considerations.

4. Managing Scope Creep for Residential Projects

Large commercial projects are usually governed by specific contractual agreements. Residential projects, where the ultimate client or customer is in direct communication with the project firm, can be more susceptible to scope creep.  

Why This Matters

Additional requests, add-on’s or other changes to the original target scope of the project must all be estimated, managed and ultimately, priced to ensure that the project meets or exceeds the original targeted profitability.

Solutions:

• Create processes to train personnel on how best to handle customer-driven changes as opportunities to upsell.