Construction can be a very profitable business, but there are a few things about the industry that can make managing profit and cash flow more difficult than in a lot of other businesses.

Every project is a little different, costs don't always come in exactly as estimated, employees and equipment may move between jobs, and customer payments don't always arrive exactly when you need them.

A job can look profitable on paper while the business is still tight on cash. Here are a few common reasons that can happen and some ways to prepare for them.

Every Project Is a Little Different

Even if you perform the same general type of work over and over, the costs aren't always going to be exactly the same.

A custom home builder may build two similar homes but have different site conditions, subcontractor pricing or material costs on each one. A specialty contractor may perform similar work on two commercial projects but have different labor requirements or jobsite conditions.

The best way to prepare for this is to keep good job-cost records and compare the actual costs back to the original estimate.

If you estimated $60,000 for a certain portion of the project and ended up spending $72,000, try to understand what caused the difference. The more history you have from completed jobs, the better information you have when you're estimating the next one.

Fixed-Price Jobs Put the Risk on You (and Customers Like Them)

With a fixed-price or lump-sum contract, the customer generally knows what they're going to pay ahead of time. The contractor, on the other hand, is taking on more of the risk if the project ends up costing more than expected.

Maybe materials cost more than you estimated, the labor takes longer, or something was missed when the job was originally priced. Unless the contract allows for an adjustment, those additional costs may come directly out of the profit on the project.

This doesn't mean fixed-price work is bad, but it does make accurate estimating and job costing that much more important.

Review your completed jobs and look at where your estimates were right or wrong. Also make sure additional work is being handled through change orders rather than letting a change in scope quietly become an additional cost to the company.

Demand Can Change

Construction companies can go through very busy periods followed by slower ones. That can make staffing and overhead difficult to manage.

When work slows down, there can also be a temptation to lower your price just to keep the schedule full and your employees working. Depending on the circumstance and overall profitability, this may be needed, but it's important to have good numbers available to help you make the decisions.

Building some cash reserves during stronger periods can give you more flexibility when the schedule isn't quite as full. It's easier said than done, but putting a plan in place and working at it pays off over the long term.

Costs Can Move Between Jobs

When you have several projects happening at the same time, employees, equipment and other resources may move between jobs throughout the week.

For example, you may have the same crew work on three different projects over several days. If that labor isn't being tracked correctly, one job may start accumulating more costs than expected without anyone realizing it.

Proper job costing will help to assign your labor, materials, subcontractors and other direct costs as regularly as possible. That gives you a chance to compare budget versus actual costs while the project is still underway rather than finding out after the job is finished that you went over budget.

Customer Payments Don't Always Arrive When You Need Them

You will likely negotiate payment terms, deposits and draw schedules before the project begins, but when you're dealing in the real world, there can always be some additional follow-up required or problems with customer payments.

A payment that's a few days late may not sound like a big deal, but when payroll is due Friday and you were expecting a large customer payment on Wednesday, those few days can make all the difference.

Retainage adds another wrinkle if it isn't planned for, since a slice of each draw is held back until the project closes out.

The long-term solution here is to work toward building enough cash reserves that one late customer payment doesn't immediately create a problem.

You still want to invoice on time and follow up on your receivables, but having cash available gives you something to pull from for payroll, subcontractors or other important expenses when the timing doesn't line up perfectly.

It can also help to look ahead at the next few weeks of expected customer payments and upcoming expenses. If you know a large payroll, material order or subcontractor payment is coming, you can make sure the cash is available before the bill is due.

Summary

There's always going to be some uncertainty in construction (any business, for that matter). Projects change, costs can vary and customers don't always pay on the exact day you expected.

Planning and having the right tools in place can help to reduce some of the issues.

Keeping your job costing current, comparing your actual costs to your estimates, staying on top of customer billing and gradually building a cash reserve can make it much easier to manage both the profit and the cash flow of the business. Work with your bookkeeper or accountant regularly so they can put a cash flow plan in place and keep you working toward your financial targets.