Our latest Blog looks at the impact of procurement methods on project cashflow.
Cashflow is an important consideration for any construction project. The procurement route affects how payments move through the supply chain, how closely expenditure aligns with progress and how much financial visibility the Customer and Funders have.
Construction Management (CM), Design & Build (D&B) and Traditional procurement each provide different approaches to managing project cashflow.
Construction Management
Under CM the Customer is in contract direct with the project Trade Contractors. This arrangement is managed and administrated by a Construction Manager, such as Scribe. The Construction Manager certifies payments which are then made direct by the Customer.
Direct Trade Contractor payments means the Customer, and their Funders, know exactly where the money is going. This allows for better cost control and lower project costs as detailed below.
Without a Main Contractor intermediary, there’s less risk of financial contamination. Payments are not subject to Main Contractor mark-ups or delays. Payments go to the project supply chain, not syphoned off to cover other loss-making Main Contractor projects.
With CM there is no Main Contractor layer of dispute impacting upon payments down the tiers. Also there are no Main Contractor financial year end targets influencing project cashflow.
As highlighted in our Cost Transparency Blog, Main Contractors are often over certified. They can be some 30%+ cash positive by manipulating interim applications for payment.
Direct CM Trade Contractor payments align outflows with actual progress. The project supply chain is not subject to unfair Main Contractor payment practices. And the Customer has confidence in paying only for what it complete
Eliminating the Main Contractor reduces the project cost. The Customer does not have to pay for their profit and risk uplifts on top of the Trade Contractor’s. The Construction Manager’s fee can be over 50% less than a Main Contractor’s margin.
These CM benefits contribute to more streamlined financial management of the construction project. This can lead to cost savings and a more predictable and efficient cashflow.
Direct Trade Contractor payments can create an administrative and finance burden on Customer. Although Scribe have solutions to ease this pressure which we can further discuss.
Design & Build
Under D&B, the Customer makes payments to the Main Contractor, who then manages payments to its supply chain.
This provides a simple payment structure for the Customer, with a single contractual counterparty and fewer payment relationships to administer. The Main Contractor is responsible for managing its own supply-chain cashflow and payment obligations.
The Customer has less direct visibility of payments further down the supply chain. However, contractual payment mechanisms, reporting requirements and statutory protections can provide oversight where required.
D&B therefore suits Customers who prioritise simple payment administration and single-point commercial responsibility.
Traditional
Traditional procurement operates similarly from a cashflow perspective. The Customer contracts with and pays the Main Contractor, who manages payments to its Trade Contractors and suppliers.
The developed design and tendered contract can provide a clear basis for forecasting construction expenditure. The Customer has a single payment relationship during construction, while the Main Contractor manages supply-chain payments.
As with D&B, the Customer has less direct visibility of the underlying supply-chain cashflow than under CM. However, this also reduces the Customer’s administrative burden.
Traditional procurement therefore suits projects where predictable contractual payments and straightforward financial administration are priorities.
Choosing the Right Route for Project Cashflow
Each route provides a different balance of cashflow control and administration:
- Construction Management: direct Trade Contractor payments, greater visibility of expenditure and closer alignment between payments and progress, with greater Customer administration.
- Design & Build: single-point payment to the Main Contractor, providing simpler administration but less direct supply-chain visibility.
- Traditional: similar single-point payment structure, supported by a developed design and tendered contract, with less direct control of supply-chain cashflow.
The right balance of visibility, control and administrative responsibility are the key drivers of the decision, it is not simply which route provides least pressure on cashflow as there are alternative ways to manage project cashflow.
With Trade Contractors paid direct they are truly incentivised to perform. It fosters a more collaborative approach to delivery across the project team.
CM can suit Customers and Funders seeking direct visibility of project expenditure and supply-chain payments. D&B suits those prioritising single-point commercial responsibility. Traditional suits projects where a developed design and established contract provide the preferred basis for forecasting and managing construction expenditure.
Specifically, there are many cashflow advantages of Construction Management. It offers significant financial benefits over Design & Build and Traditional procurement routes, including:
- No Main Contractor cross-contamination of payments
- No delays to Trade Contractor payments
- Reduced outflow with no Main Contractor overmeasure or markups
- Fosters a collaborative approach to project delivery
- Customer cost savings
- More predictable, efficient and true project cashflow
Contact Scribe to apply the Cashflow Advantages of Construction Management on your project. Please comment below, and read our other Blogs.
