Where the money goes in a construction company

To four places, and almost never to a revenue problem. Owners who are stressed about cash nearly always have a visibility problem: the money is in the business, they can't see it, and what they can't see they can't control. The four places are job costing that doesn't say which job made money, an overhead rate lower than the real overhead, billing and collections that leave earned cash in someone else's account, and no forecast of the weeks ahead.

Four buckets for material, labor, equipment and subs tell you what the company spent. They don't tell you which job made money and which one cost you the year. Job costing puts every hour, every invoice and every piece of equipment against the job that used it, and once it does, about half the jobs that felt like winners turn out to be break even.

Every bid includes an overhead percentage, and for most subcontractors it's well under what overhead really costs. When it's low, every job starts behind on the day it's signed. A company that bids 10 percent overhead while the real rate is 30 percent loses money on every job it wins.

This is where profit turns into cash, or doesn't. Bill too little on a pay application and you pay for the job yourself until the next one goes in. Let receivables age and you borrow against money you've already earned, while the cash waits in someone else's account.

The P&L says what happened, and the WIP schedule tells the bank where the jobs are. Neither one says what's coming. A rolling 13 week cash flow forecast does, and it shows a short week while there's still time to do something about it.

If the plan is that the next big job fixes the cash, it won't. A bigger job moves more money through the same system you can't see into, so whatever was wrong gets bigger along with it. Fix what you can see first, and the work you already have pays more.

Projects making 22 to 30% gross profit, The company with 12% net profit, $650,000 in the bank at all times. Those are the outcome targets in CONTROL, and they come in that order, with the project first, the company next and the balance sheet last. A slow month turns into an inconvenience and stops being an emergency.

The four places line up with step 01, job cost structure, step 03, overhead calculation, step 06, project management, step 07 and monthly cadence. Each step depends on the ones before it, so job costing comes first. Every step has its own page on this site with what it depends on and what it changes.