Utah Contractor Practice Exam

What is a recommended strategy for a contractor to avoid cash flow issues at the end of a construction project?

1. Obtain a line of credit from a bank

2. Order all materials before beginning work

3. Seriously consider changing the payment schedule

4. Ask the owner to make payments before they are due

The correct answer is: Obtain a line of credit from a bank

Obtaining a line of credit from a bank is a recommended strategy for contractors to manage cash flow effectively throughout the duration of a construction project. A line of credit provides a financial safety net that can be accessed when cash flow is tight, ensuring that the contractor has the necessary funds available for operational expenses, unexpected costs, or delays in payment from clients. This approach helps in maintaining a steady flow of cash, allowing the contractor to meet payroll obligations, pay for materials, and cover other essential expenditures without interruption. It is a proactive financial management technique that can help avoid the common problems associated with cash flow shortages, particularly as a project nears completion when funds may become particularly strained due to increased demands on finances. Other strategies, such as changing payment schedules or asking for early payments, can lead to complicated negotiations that may not always be favorable or possible with the owner. Similarly, ordering all materials at once can lead to cash flow issues at the start of a project, especially if payment for those materials is due before the work commences. Therefore, securing a line of credit stands out as a practical solution to maintain liquidity throughout the project's lifecycle.