While in theory these two critical scoreboard metrics are disconnected in reality cash flow is a pretty reliable predictor of profitability both good and bad.
- It is impossible to have good cash flow for the whole duration of a project if you are going to ultimately lose money. With great cash flow management practices it is entirely possible to keep a “loser job” cash flow positive throughout the duration until the last few months but ultimately it will end negative. Therefore great profitability is a prerequisite for great cash flow.
- The reason banks and especially sureties watch under-billings like hawks is because chronic under-billings unless specifically built into the contractual terms are almost always an indicator of margin-fade. The same goes for slow receivable collections and change order processing all of which contribute to poor cash flow.
During a 10 year project analysis looking at jobs over $1M for a well-run MEP contractor there was exactly 1 project that had poor cash flow throughout the project and margin gain. And that was due to a single $2M change order that was slowly processed due to contractual terms!
What if you engaged your project teams to pay as much attention to cash flow as they are taught to pay to gross margin and labor hours?
We are revamping our publicly available cash flow workshop that includes 18 techniques that contractors can use to accelerate cash flow. Stay informed of updates on release.