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How to cure financial headaches

Managing project costs amid the maelstrom of construction pressures requires a real focus on priorities, says Tim Cole.

The cashflow and profitability of a project depend on how well procurement, accruals, valuation and payment applications are managed.

Time is always tight. Profit margins are tighter. If contracted client payments as well as project costs are tied to progress there should be a link between expenditure and income.

The financial goal of a successful project is to receive timely payments from your client – this both funds your operations and confirms progress is being made against agreed milestones.

Have a plan in mind

Therefore, from the outset, you need to have a clear plan that ties together the cash outgoings with the cash payments you will receive.

If payments have been linked to defined milestones then expenditure should, where possible, be planned around the same milestones.

Similarly, work plans need to progress in the same way. If the proposed payment milestones are not logical, these need to be re-negotiated so that the relationship between activity and income works for both parties.

Specialist costing software, can help maintain cashflow control, but only where controls facilitate the relationship between expenditure, consumption and income. Simply knowing that you have spent a large amount on concrete does not mean you have sufficient evidence to submit a specific payment application.

Managing project costs is never a task with a single dimension. Cost management to one person is another's value management, payment plan or cashflow.

On successful projects these objectives align and everyone understands what they will be paying; when they will be paying it and why.

A practical approach

In a structured approach income and expenditure could be planned in the following way:

  1. Payments from the client are linked to project milestones.

  2. Expenditure allowances are identified against the same project milestones.

  3. Purchase orders raised create a 'committed cost' (a confirmed plan that will be linked to a payment in the future).

  4. Matching a material or service delivery against a purchase order converts the committed cost into an accrual (an expense for which an invoice is due).

  5. Matching accrued costs to invoices establishes a creditor.

  6. Valuations produced and payment certificate (application for payment) sent to the client.

  7. Payments are made by client.

Such an approach provides a clear monitoring structure and early visibility of discrepancies which could jeopardise a project. Overspends need to be flagged up so that the causes can be analysed and addressed.

Project costing, if managed around a clear process and supported by specialist software, delivers cashflow management and the visibility to analyse progress in real time. This helps you spot problems early and receive payments in a planned and timely manner.

Tim Cole is a director at Causeway Technologies.