FINANCIAL CONTROL

Financial control is one of the major essential elements of a

construction project, in
addition to the project schedule, budget, resource control,
quality control, safety, and
client satisfaction. Financial control is the carrying out of all of
the fiscal duties and
responsibilities of the project, as required contractually, along
with good and prudent
business practices. This includes a breakdown of project costs,
forecast of project
expenditures, progress payments, payments for extra work,
processing of change
orders, resolution of claims and disputes, waivers of lien,
documentation required for
payment, reduction of retainer, timely payments, and final
payment.
One of the most important requirements for keeping a project
healthy is cash flow manage-
ment. Cash is king and without sufficient cash, it is difficult to
meet payrolls and pay union
dues, taxes, benefits, suppliers and vendors, equipment rentals
and purchases, utility bills,
and subcontractors. The timing and amount of payments is a
serious matter for the construc-
tion manager/general contractor (CM/GC) to pay attention to,
because without operating
capital, even a highly profitable and successful project can
present a problem. The CM/GC
must have in place a financial management system to monitor
and control project pay-
ments, cash flow, disbursements, and control payments to
material vendors, subcontractors,
and suppliers. In addition, the system needs to ensure that
financial standards required con-
tractually, legally, and by established accounting practices are
complied with.
When building in the urban environment, some of the major
projects are constructed
with union labor, which presents further demands on cash flow
requirements to pay
union dues, benefits, and payroll taxes. These payments must be
made to the union and
the governing authorities, whether payment of the requisition
has been made. Non-
union projects do not have this additional cash management
challenge.
CM/GCs must ensure that they have sufficient operating capital
to fund the day-to-day
payments and disbursements for doing business until the owner
pays the requisition.
Firms must rely on retained earnings, lines of credit, business
loans, private venture
capital, factoring, or equity from the public or private markets
for operating capital to
fund their ongoing operation. It is not sufficient to just have a
good income statement
and balance sheet; they also need positive cash flow and money
in the bank, which is
what pays the bills.
If payment is not made for work performed, the CM/GC has the
right to place a lien on
the property for the value of the work performed and not paid.
This is not a measure to
be taken lightly, as the owner will be rather upset with the lien.
It encumbers the title to
the property and makes it difficult for the owner to obtain
financing or sell the property.
If the owner does not pay a requisition on time, it is
recommended that the CM/GC have
the accounts receivable department along with the project
executive contact the client to
find out why the requisition has not been paid, and try to obtain
the outstanding pay-
ment. Subcontractors, when they have not been paid, have a
tendency to slow down the
project by not supplying adequate personnel and materials to
perform the work, which
ultimately can lead to a delay in the overall project. If a lien is
placed on the property
due to lack of timely payment, it is recommended that the
subcontractors, suppliers, and
vendors, rather than the CM/GC place the first liens. In this
manner, the CM/GC can
place pressure on the owner to pay the outstanding requisitions
without jeopardizing
their relationship. The owner usually has the contractual right to
have the CM/GC bond
the lien. In this situation, the CM/GC can tell the owner that the
subcontractor’s lien is
beyond his control, and request that the owner make payment of
the requisition.
REQUISITION

Chapter Twenty
Firms must rely on retained earnings, lines of credit, business
loans, private venture
capital, factoring, or equity from the public or private markets
for operating capital to
fund their ongoing operation. It is not sufficient to just have a
good income statement
and balance sheet; they also need positive cash flow and money
in the bank, which is
what pays the bills.
If payment is not made for work performed, the CM/GC has the
right to place a lien on
the property for the value of the work performed and not paid.
This is not a measure to
be taken lightly, as the owner will be rather upset with the lien.
It encumbers the title to
the property and makes it difficult for the owner to obtain
financing or sell the property.
If the owner does not pay a requisition on time, it is
recommended that the CM/GC have
the accounts receivable department along with the project
executive contact the client to
find out why the requisition has not been paid, and try to obtain
the outstanding pay-
ment. Subcontractors, when they have not been paid, have a
tendency to slow down the
project by not supplying adequate personnel and materials to
perform the work, which
ultimately can lead to a delay in the overall project. If a lien is
placed on the property
due to lack of timely payment, it is recommended that the
subcontractors, suppliers, and
vendors, rather than the CM/GC place the first liens. In this
manner, the CM/GC can
place pressure on the owner to pay the outstanding requisitions
without jeopardizing
their relationship. The owner usually has the contractual right to
have the CM/GC bond
the lien. In this situation, the CM/GC can tell the owner that the
subcontractor’s lien is
beyond his control, and request that the owner make payment of
the requisition.
REQUISITIONS
The requisition is the invoice that the CM/GC submits to the
owner for payment, usu-
ally on a monthly basis, for the work performed on the
construction project. The requi-
sition is based on the contract amount, schedule of values for the
work, the percentage
of work completed for the current period, minus any prior
payments received, and
minus retainer to be held (which is usually 10%). The contract
between the owner and
the CM/GC will provide for partial payments of the contract
amount based on the
progress of the work, on a periodic payment cycle, which is
usually monthly. The
request for payment or requisition involves a compilation of the
cost of the work
accomplished since the last payment cycle. Having the architect,
engineer, and owner
walk the project with the GC to determine the status of the work
completed and the
amount of money to be paid for the work performed during the
current invoicing period
usually accomplishes this. This process is called the “pencil
copy meeting.”
The total value of the work completed can be obtained in
different ways, depending on
the terms of the contract and the preferences of the owner and
CM/GC. Under a lump sum
contract, the progress is usually measured by the estimated
percentage of completion of
each major project component or trade. This is then multiplied
by the schedule of values
for each item or trade, comprising the total contract value, minus
all prior payments to
arrive at the payment amount for that period. For a unit price
contract, the progress is usu-
ally measured by the amount of units of work put in place to
which the unit prices apply.
One item that the CM/GC must look out for is “front end
loading” of the requisition by Requisitions the subcontractors.
This entails invoicing for more money than the value of the
work put
in place. The process of “front end loading” a project affords the
subcontractor access to
money and operating capital beyond the value of the work
completed. If there is a dispute
with the subcontractor, and another subcontractor has to be
brought in to complete the
work, there may not be sufficient money left over to complete
the work. This could also
be a potential problem if there is a large punch list item to be
resolved and there are insuf-
ficient funds withheld to cover the remediation of the problem.
The owner will usually pay for materials stored on- or off-site if
the material has been
inspected and a certificate of insurance obtained for the material
stored off site, protect-
ing all parties’ interests. Exhibit 20-1 illustrates a sample pencil
copy of requisition.
Exhibit 20-2 is a checklist for preparing a requisition.
Small Subcontractors
There are times when a monthly payment cycle is insufficient to
meet the cash flow
requirements of a project, especially if you are dealing with
small businesses. This pres-
ents a challenge to the CM/GC to be able to attract small,
minority, disadvantaged, local,
and woman-owned business enterprises to bid the project and
perform the work. Special
provisions may need to be made to provide for payment to these
smaller start-up firms
on a more frequent basis other than monthly, for example,
requisitioning twice a month.
In addition, owners sometimes delay payments to the CM/GC
beyond the contract
terms of 30 days, which in turn delays payments to
subcontractors, suppliers, and ven-
dors. The owner is then placing the CM/GC in the position of
being a “banker” rather
than a CM/GC, which is not their business. Many contracts have
a “paid when paid”
clause, which simply states that the subcontractors will be paid
when the owner makes
payment to the CM/GC and not before. This contractual
provision is not legal in many
states, and the subcontractor has the legal right to demand
payment from the CM/GC,
whether the owner has paid them. If payments go beyond 60 to
120 days, many
CM/GCs, subcontractors, suppliers, and vendors find themselves
in a cash flow crisis.
Timing of Requisition Payments
Once the requisition is produced, submitted, and approved for
payment, the owner usu-
ally has 30 days to make payment, as per the terms of the
contract. In essence, this
means that the work that is requisitioned each month will not be
paid for 30 days, or
the following month at best. Sometimes payments can be
delayed for 60, 90, or
120 days. The CM/GC has to ensure that there are sufficient
funds available to fund the
construction project for this period. If by chance the owner is not
satisfied with a given
month’s requisition due to an item not be properly documented
and invoiced, it is rec-
ommended that the CM/GC advise the owner to delete that item
from the current req-
uisition and adjust the amount accordingly. This should be done
in lieu of returning and
resubmitting the requisition and thereby delaying the payment.
Another approach is to
adjust the item on the next month’s requisition, with an
appropriate credit, if the owner
is cooperative and trusting in the process. The item needing
further clarification can
then be invoiced on the next month’s requisition without
adversely affecting the balance
of the work to be paid for the current requisition. See also
Chapter 17 for processing
and payment for change orders