Challenges Faced by Commercial Building Contractors and Improving Cost Management Activities

Civil Construction and Building Procurement 1
Civil Construction and Building Procurement
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Civil Construction and Building Procurement 2
a). Challenges faced by commercial building contractors during projects execution.
Cash flow impacts all aspects of the construction project implementation process and the
project might fail as a result of cash shortage allocated for the project. The most critical issue
the contractors are facing is securing sufficient cash flow at all phases of construction project
implementation. Sufficient cash flow is essential for three objectives, for example, paying labor,
overhead and expenses on the material so that the execution of construction activities can be
carried out according to the schedule and to reduce financial liabilities (Alles, 2010).
The business can only be profitable if there is an effective cash flow management and the
contractors should avoid carrying out work that exceeds the cash or credit available regardless
of scheduling requirements. The cash flow is one of the most critical aspects of the proper
management of any construction industry. The flow of cash takes place at three levels, the
company management level, an individual manager level and individual level in terms of
productivity (Birchall, 2008).
The construction is the lifeblood of the economy along with agriculture and is one of the
contributors to the economy. Only about half of startup businesses remain operational after
the first four years of operation. The cash flow problems can be accounted for in various
reasons for failure and the problem can begin from the failure to convince creditors and
possible lenders of the money. This is inadequacy is only temporary and would not result lead
to bankruptcy. This makes forecasting cash requirements essential in order to make provisions
for difficult times in the future (Bragg, 2016).

Civil Construction and Building Procurement 3
There are so many factors causing that for cash disparities in the cash flow and some of the
different categories of failure can be broken into supplier problems, financial issues,
subcontractor issues and communication throughout the whole project. The cash flow is a
communication issue, the delay to cash flow can have a series impact on the project and in time
the reputation of the entity with the communication problem (Cooke, 2014).
The construction is unique for both small scale as well as large scale industries and is often
deliberated one of a kind industry. The work repeated brings efficiency and improved
productivity, construction uses the concept of subcontractors and distinctive suppliers to offer a
small step in the path to multiple unit manufacture (Domann, 2011). The company profits can
provide an excellent return on investment but this need an effective cash flow procedure and
the construction company has to found the work for the period at the start until the first
repayment and so:
 The average cost items are not billed for 15 days.
 Assuming a 30-days settlement of the account.
 Assuming invoices submitted monthly at the end of the month.
 The amount settled is 90%
 The 10% remaining is obtained until the end of the contract payments.
If the company operates on a ten percent profit, then the company is neutral at best cash flow
from first payments. Delaying payments to sub-contractors for as long as possible is the best
method of funding this particular contracts. According to Cooke (1986), cash flow is defined as
the movement of money flowing in and out of the business and positive cash flow involves

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money flowing into the business while negative cash flow involves money flowing out of the
business and this involves cash spent on buying materials, paying wages and overhead
(Fewings, 2015).
There are numerous factors can affect the company and causes issues relating to cash flow and
this include;
 The control of cash can be critical since there is intense competition in the construction
industry.
 The indirect costs often surpassed the direct cost and making it sometimes difficult to
control over indirect costs can be difficult when it comes to market volatility.
 The macroeconomic and budgetary issues within the construction industry can cause
more than 80% of company failure.
The main reason why construction suffers the largest number of bankruptcy is due to poor
financial management and in order for the company to succeed, there is need of understanding
profit and loss clearly though poor management of cash flow is plaguing the construction
industry. The payment is a major problem which is faced with construction industry; the
payment of the client usually gets cleared in 45 days after billing and the vendors are required
to be paid usually within a period of 30 days but paying of employees should take place thus
resulting to negative cash flow. There is a need for proper financial resources and without
them, it may result in the disastrous capital outflow (Greenhalgh, 2013).
The capital system is needed for providing sufficient equity forms to a company to allow it to
commence and survive. The flow of cash ensures the capital equity market receives sufficient