Building projects are often complex and unpredictable, therefore, rigorous construction finance management is paramount. Good financial management leads to profitability, a positive cash flow, happy clients, and successful completion dates. If financial management is handled poorly, it can lead to financial loss and even risk business closure.
In addition to this, the work involved in the construction industry can last anywhere from a few months to a few years, depending on the job, which further adds to the complexity of the finances.
The size of the project, labour costs, material prices, and even weather conditions also impact the finances of a project, therefore financial management in construction is always a challenge.
In this article, we will explore:
Construction finance management is a vital cog in the construction machine. It is responsible for the planning, organising and control of financial resources, in order to remain on course with budgets and schedules of the construction project.
Unlike some other industries, construction project costs vary from project to project. In particular, when we examine material costs, they can fluctuate wildly during a project.
For example, the international price of wood between April 2020 and April 2021 increased by 539% putting a strain on the construction industry as a whole. So, the tendered price of materials can be completely different to the price upon purchase.
Managing the finances appropriately can achieve great financial results and profitability of the company, if done well.
From the start of any building project, construction financial management is incredibly important. The tendering process is often a struggle for construction companies when competing for a lucrative project. Although you may want to win the bid for the job, without effective management, you could lead your business to financial loss by bidding too low. If a low bid is accepted, your company has to stick to the commitments you made on the tender, therefore missing any deadlines can lead to losing money on the project.
Once construction starts, there are lots of moving parts which could impact the financial health of your company. Therefore, the importance of financial management in construction becomes more apparent as the handover date and completion of the project approaches.
To quote the National Construction College, "It has never been more important for business owners and senior managers to understand good financial management of the construction process, from tendering right through to managing costs and agreeing the final account. In today’s market, it is essential that construction businesses understand the process and have the controls in place in order to have a realistic chance of making a profit."
Understanding how to utilise finance management is vital to the operation of your construction business. Being in control of your business finance plan prevents any potential disruptions to your construction projects.
The key components of construction finance management include:
Budgeting: arguably the most important foundation of your construction projects. It adds up the costs of each aspect of a build to give you a clear view of where the finance is allocated. Construction budgeting accounts for tasks such as purchasing property or land, surveying fees, materials, labour, equipment, and project management.
However, common issues that arise in the process of budgeting are inaccurate estimations, competitive contractors and a low contingency budget.
Estimations are usually the remit of the quantity surveyor. If they perform inaccurate estimations, they are setting up a project to fail.
Contractors know their value. They tend to judge whether to accept a job based on their relationship with the hiring company and if better opportunities are available. In fact, the CITB estimates that the UK will need an additional 225,000 construction workers by 2027 in order to keep up with demand within the industry.
The contingency budget is an integral part of the construction budget. If there are any unexpected delays or costs, your contingency budget will cover these expenses.
It is therefore important to allocate plenty of time and resources to creating an accurate budget in order to achieve the targets you set at the start of your construction projects.
Cash Flow Management: this involves the management of income and expenditure. Effective cash flow management ensures that you have finance available to spend on the necessary elements of your projects when they are needed.
A negative cash flow can happen when bills are paid too early because it can leave your business low on working capital if enough money isn’t coming in. It is important to avoid upfront payments to contractors, delayed invoicing for materials, and, if possible, slow paying clients.
Creating a more positive cash flow can be achieved by forecasting. In your forecast, identifying when the company will experience shortfalls can help you manage instances where you lose a bid and are left without a project to work on.
Cost Control: managing your expenses helps you stay aligned with your budget. Identifying the areas where costs can be reduced, or adjusting your expenses due to unforeseen circumstances such as poor weather, is an effective way to stay on track for your project.
Financial Reporting and Accountability: this is a constructive way of confirming that your stakeholders and construction team are all aware of the project’s financial status. If your financial report is well structured, it eliminates problems of miscommunication, insufficient funds, and delays of reaching the project’s completion date.
In short, a team effort! Whilst there may be someone who takes on the role of construction finance manager, there are different roles within the team that contribute to the success of the company’s finance management.
For example, there are a number of people in your team that bear financial responsibility:
If your team is involved in the financial monitoring of your construction project, any potential pitfalls will be identified, evaluated and rectified quicker. Sharing information and keeping a good level of communication can lead to more efficiency and faster completion of the project.
A good example of this is early in a construction project. Groundworks are often the first physical work that occur on a new building site.
Preparing the ground for which your building is to be constructed on is an integral part of ensuring the stability and longevity of a building project. If targets at this early stage are not met it could lead to financial loss for the entire project. Therefore, communication is important between team members to get the right equipment and workers to ensure targets are met. This could mean purchasing or hiring additional excavators in which seeking digger finance is the solution. If finance is required, communication needs to be as efficient as the groundwork, with a decision made before the work starts and equipment on site, ready for the work.
A sufficient financing solution is essential for construction businesses. Although some projects can be self-funded, (depending on the overall cost), external financing can help your business when it comes to large-scale and more complex projects.
At Union Business Finance, we provide a range of construction finance and loans to boost your business’ growth.
Contact us to learn more about how we can help with funding your construction project.