Where Business Challenges Arise in a Construction Business
Construction business owners and decision-makers deal with challenges at company and project level at the same time. Market conditions influence the work available and the prices submitted. Contract terms affect how much risk the company carries, while project performance determines whether the tendered margin becomes actual profit and cash.
The company’s management systems determine what its owners can see and how quickly they can act. Reliable reporting can expose a declining project margin while management still has choices. Poor reporting leaves owners responding to a cash shortage or project loss after much of the damage has already occurred.
| Part of the business | Business challenges that owners and decision-makers may face |
|---|---|
| Market and pipeline | Rising costs, labour shortages, unsuitable tenders, reduced demand or too much reliance on one customer or type of work |
| Projects and contracts | Low tender margins, unfavourable contract terms, delays, unrecovered variations and inconsistent project delivery |
| Financial management | Cash flow shortages, excessive work in progress, retention, poor forecasting and overheads that no longer suit the business |
| People and management | Too many decisions returning to the owner, unclear responsibility, inconsistent Project Manager performance and gaps in management capability |
| Growth and business systems | Reporting, controls and internal systems that have not kept pace with the company’s turnover, projects or workforce |
Some business challenges can be dealt with by the company’s existing team once the cause is clear. External advice becomes useful where several parts of the business are affected, management cannot obtain a reliable explanation from its current reports or the company needs legal, commercial, financial and operational input to make the decision.
Rachelle Hare – In my experience
A construction business problem rarely stays within the department where it first appears. Owners and decision-makers need to understand what is happening across the company before they commit people and money to fixing it.
Cash Flow Problems in Construction Businesses
One recent review began with an owner who believed overdue customer accounts were causing the company’s cash shortage. The concern was justified because several substantial invoices remained unpaid while wages, subcontractor claims, suppliers and tax continued falling due. Collecting those debts would bring cash into the company, although the amount and timing of customer payments did not explain why its cash reserves had been reducing for months. The cost-to-complete forecasts provided the missing information. Several projects had been won at margins that could not absorb labour overruns and higher subcontractor costs, and the company had been using its own cash to keep delivering them.
Why Collecting the Overdue Accounts Was Not Enough
The company needed to pursue its debtors, but it also needed to correct the project and business problems creating the continuing shortfall. Each project’s forecast had to include its committed costs, remaining labour and procurement, approved and unapproved variations, retention and the work still required to reach completion. Those figures then had to be reconciled with a 13-week forecast covering the company’s expected receipts, wages, subcontractor claims, supplier payments, tax and overheads. This allowed the owner to see which projects required further funding, when the company’s available cash would be lowest and whether its expected project margins would cover the cost of running the business.
Read more about Construction Financial Management and Cash Flow.
Increasing Turnover Without Increasing Profit
Turnover shows the value of work performed or invoiced. It does not show how much the company retains after paying the projects’ direct costs and the overheads required to run the business.
As a construction company takes on more work, it may need additional Project Managers, supervisors, administration staff, premises, equipment and systems. Those costs can increase before the new projects contribute enough margin to cover them. If management looks only at revenue, the company can appear to be growing successfully while its net profit declines.
Project-level reporting is needed to see where the company earns its margin. Management should be able to compare the tender allowance with actual and committed costs, assess the work remaining and update the forecast before each project’s financial result becomes unavoidable.
A company’s accounts may show that its overall profit has fallen. Current project forecasts are needed to show which jobs contributed to that result and whether the same problem is continuing.
Taking On More Work Than the Business Can Manage
More work will not assist a construction company if its current projects are already stretching its cash, staff or management capacity. A new project starts consuming resources before it makes a useful financial contribution to the business.
The bid decision should take account of the project’s margin, payment terms, contract risk, delivery period and staffing requirements. Management also needs to consider what else the company will be delivering at the same time. Several suitable projects can become difficult when they require the same experienced people or large payments during the same period.
We have seen construction businesses double their turnover while earning less profit. The additional work exposed weaknesses in estimating, reporting and project control that were less obvious when the company was smaller.
This does not mean that the company should stop pursuing growth. It needs enough information to decide which work fits its capability, cash resources and commercial requirements.
When Too Many Decisions Depend on the Owner
Owners often retain responsibility for pricing, contracts, key customer relationships and major project problems. Their involvement can be useful, particularly where a decision carries substantial financial or contractual risk.
Problems develop when supervisors and managers also refer routine decisions to the owner. Approvals take longer, staff avoid responsibility and the owner spends much of the day resolving issues that should have been dealt with elsewhere.
The reason is not necessarily a lack of capable staff. Managers may not know what they are authorised to approve, or they may lack reliable project information. A Project Manager cannot take proper responsibility for a job without knowing its current costs, contractual requirements and forecast margin.
Construction companies can address this by setting approval limits and clarifying who is responsible for particular decisions. For example, the company might set separate authority levels for procurement commitments, variation settlements, tender departures and project write-offs. Reports to the owner can then concentrate on decisions outside those limits and projects requiring intervention.
Different Project Managers, Different Project Results
Project Managers develop their own ways of running jobs. One may issue notices on time, update the variation register and revise the project forecast each month. Another may rely on conversations with the customer, leave variation pricing until later and continue reporting against the original budget.
The difference affects what management can see. A current forecast gives the owner time to respond to falling productivity, procurement overruns or an increasing cost to complete. An outdated forecast can leave the same problems hidden until the project is close to completion.
Subcontractor management also varies between Project Managers. Incomplete scopes, late appointments and poorly recorded directions can increase costs and make claims harder to assess. Similar projects can produce very different results because the company has not set minimum requirements for how its Project Managers handle these tasks.
What the Company Needs From Every Project
Management should decide what each Project Manager must report, how often the information is required and which supporting records need to be maintained. Forecast margins, committed costs, variations and major risks should be reported on the same basis across all projects.
The company also needs consistent requirements for contract notices, procurement approvals, subcontract administration and escalation. These controls allow Project Managers to use their judgement while giving management reliable information across the whole portfolio.
Our External Commercial Manager Services can help construction businesses improve their commercial systems, project reporting and contract administration.
Contract Terms and Contract Administration
Construction contracts can leave contractors with limited room for estimating and delivery errors. A fixed price must cover the scope, labour, materials, subcontractors, risk and overhead contribution allowed for when the project was priced.
Contract amendments can change that calculation. Broader design obligations, strict time bars, delay exposure or unfavourable payment terms can increase the company’s risk without changing the price. If those amendments are accepted after tender, the project team needs to understand the position the company has agreed to.
Administration during delivery affects the company’s ability to enforce its contractual rights. Late notices, incomplete records and unclear directions can weaken an otherwise supportable variation or extension of time claim. Waiting until the project’s end to reconstruct what happened is expensive and gives the company fewer practical options.
Giving the Project Team the Information It Needs
The person reviewing or negotiating the contract will not necessarily be responsible for administering it. The company needs to hand the signed contract over to the Project Manager with a clear explanation of its notice periods, variation procedure, payment terms and major departures from the company’s usual contracts.
Head contract and subcontract terms should also be checked together. The company can be left carrying cost, time or design risk where its subcontract does not support the obligations it accepted from the customer.
Our Construction Contract Review Services help contractors understand legal and commercial risk before they sign. Where the same administration problems are occurring across several projects, the company may also need to review how its project teams use and manage their contracts.
Management Systems as the Business Grows
A construction company turning over $5 million can often rely on direct owner involvement and informal communication. Those arrangements become harder to maintain as the company approaches $20 million or $50 million, employs more managers and carries a larger portfolio of projects.
Information that once sat in the owner’s head must be recorded and available to other people. Managers need defined authority. Project reports must use consistent assumptions, and contract records cannot remain scattered across individual inboxes.
The company does not need every procedure used by a Tier 1 contractor. A smaller contractor is unlikely to benefit from layers of reporting that its staff cannot maintain or management does not use. It does need controls appropriate for the value and risk of its work.
For example, a growing contractor may need a formal contract handover, monthly cost-to-complete forecasting and clear approval limits without introducing a large corporate reporting system. The aim is to give the owner reliable oversight and support the people responsible for delivering the projects.
Changes also need to be timed properly. Hiring managers too early increases overheads before the company has enough work to support them. Leaving the existing team overloaded for too long can damage projects, customer relationships and profit.
How Rachelle Hare and Shannon Drew Help
Rachelle and Shannon begin with the problem the owner wants to resolve. They ask what has changed, which projects or parts of the business are affected and what information management currently relies on.
Rachelle brings more than 25 years of experience in Construction Law and Commercial Law, including private practice, General Counsel and Commercial Management roles. She has worked inside construction businesses and understands how tender decisions, contract terms, project administration and management responsibilities affect the company’s financial result.
Shannon has more than 25 years of experience as a Management Accountant, Costs Accountant, Virtual CFO and Business Adviser. He can examine the company’s cash flow, job costs, forecasts, overheads and financial reporting, then compare what the accounts show with what is occurring across the projects.
Their combined work is particularly useful where the owner cannot separate a financial problem from the projects, contracts or management decisions contributing to it. The scope depends on the problem and the amount of investigation required.
Some recommendations can be implemented by the owner and the existing team. If the company needs further Business Advisory, Construction Business Improvement or Legal Services, Blaze Business & Legal will agree the additional scope and price before that work begins.
Frequently Asked Questions About Construction Business Challenges
1. What information can help identify a construction business problem?
Information that can help identify a construction business problem includes current project forecasts, job-cost reports, management accounts, cash flow forecasts, aged debtors, variation registers and major contracts. The records required will depend on whether the owner is concerned about cash, profit, a particular project or the company’s overall performance.
2. Do I need to know what is causing the problem before contacting Blaze Business & Legal?
You do not need to know what is causing the problem before contacting Blaze Business & Legal. You can explain what you have observed, when it started and how it is affecting your business. Rachelle and Shannon can then work out what information is needed to investigate it.
3. Can Rachelle and Shannon work with my Accountant or management team?
Rachelle and Shannon can work with your Accountant, bookkeeper, managers and other advisers where their input or records are relevant. Their role is not to replace advisers who are already doing their jobs well. They focus on the business problem you have asked them to examine and how the available legal, commercial, financial and operational advice fits together.
4. Can Blaze Business & Legal help implement the recommended changes?
Blaze Business & Legal can help implement agreed financial, commercial, operational, contractual or management changes. The work required will depend on what the review identifies and what your team can complete internally. Any implementation work will be scoped and quoted separately.
5. Is Legal Advice included with Business Advisory?
Rachelle provides Business Advice during a Business Advisory engagement unless Blaze Business & Legal has separately agreed to provide Legal Services and formally engaged her as your Lawyer. If the work identifies a legal issue, Rachelle can explain the separate Legal Service and provide a quote before giving Legal Advice.
6. What happens during a Strategy Session?
During a Strategy Session, you discuss your business’s problem with Rachelle Hare, Shannon Drew or both advisers. They work through what you already know, question your current assumptions and discuss preliminary steps you can take. The session does not include written advice unless Blaze Business & Legal separately quotes for it.
Work Out Which Business Challenges Are Affecting Your Construction Business
If your construction business is short of cash, losing project margin, struggling with inconsistent delivery or relying too heavily on you, Rachelle Hare and Shannon Drew can help you investigate why.
A Strategy Session costs $650 plus GST with either Rachelle or Shannon, or $750 plus GST with both advisers. You can use the hour to work through the problem and discuss preliminary steps that you can implement yourself. You do not have to engage Blaze Business & Legal for further work.
Real Advice | Action Plan for Moving Forward | No Obligation
