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Bringing Finance Management in Construction to a New Level: Tips from Zeeshan Qureshi

Bringing Finance Management in Construction to a New Level: Tips from Zeeshan Qureshi

Published 3 May 2024
In the dynamic landscape of construction, financial management demands are both unique and complex. Our guide is Zeeshan Qureshi, a distinguished finance professional with 19 years of experience across Asia and the Middle East. As a Fellow Member of the Association of Chartered Certified Accountants (ACCA), he plays a pivotal role in the finance team of AL Memzar Contracting LLC, applying his deep knowledge of IFRS, IFAC, and ISA.

In this article, he explores the practical challenges of managing construction finances, from navigating cash flow issues and utilizing innovative software to strengthening bank and supplier relationships. With a career marked by high client satisfaction and strong leadership, our author provides insights and strategies to elevate financial management in the construction industry, focusing on strategic planning and effective communication to ensure project success.
Contents

Overview of Financial Management in the UAE Construction Industry

The UAE construction industry presents a diverse landscape in terms of financial management. Established companies with long-term business strategies, like the one I am part of, demonstrate robust financial health and are able to sustain and grow in the market. These companies typically diversify their business models. For example, Memzar started as a construction firm in 1993 and then expanded into a group of companies by entering the healthcare and food and beverage sectors. Now we have some clinics and two big hospitals, one more hospital is on the way. We also have a food and beverage center and a coffee brand. That is what contributes to our financial stability.

In contrast, companies focusing on short-term goals often struggle to manage their finances effectively and don’t last long on the market. Especially if we speak about the UAE market which I would describe as a 'short market.' By this, I mean that it is tightly-knit — geographically the region is small, and the business community is closely interconnected. Professionals from various companies, especially within the finance sector where I work, frequently interact with each other across different industries. We meet regularly, share insights, and discuss the challenges we're facing in our respective sectors. This close communication means that information about company performances, both good and bad, spreads quickly. Everyone knows which companies are excelling and which are falling behind.

What is Efficient Finance Management?

Good finance management, particularly in the construction industry, hinges on precise and proactive financial oversight for each project.

One effective strategy we use is the 'matching concept'. It requires expenses to be recognized in the period in which the related revenues are earned. And it also involves managing each project's finances independently. For instance, when we initiate a new project, we open a separate bank account specifically for that project. All funds collected for that project are deposited into this account, allowing for targeted management of these finances.

From this account, we closely monitor incoming funds and expenditures to ensure we always have a financial advantage. This approach prepares us to handle delays or any unforeseen expenses without compromising the project’s progress. I should have enough availability of finance in my company so that if any short short-term financing is required or I have to wait for some time, I can manage it within my available funds that I have for that particular project.

Furthermore, as a finance manager or CFO, I maintain constant communication with project managers to stay updated on any potential challenges. It’s crucial to understand the dynamics among the key project stakeholders: the contractors, the owner, and the consultant. The consultant acts as an intermediary, providing independent assessments that we must accept. Regular engagement with the consultant and project managers helps ensure that everything is going smoothly and any challenges are addressed promptly.

Key Challenges in Finance Management of Construction Projects

Delays. The primary challenge in managing construction project finances is completing projects on time. Delays are critical because they lead to additional costs that can significantly eat into our profits.
Variations. Another crucial thing is managing variations within the project. These should ideally allow us some additional time and result in extra revenue.
Budgeting. Ensuring our budgets are comprehensive and cover all project aspects is also a significant challenge.

How to Manage Delays

When we start a project, we submit a detailed plan to the consultant showing monthly progress expectations — for example, 3% in the first month, 5% in the second, and so on, aiming to cover the entire project duration. We monitor our progress meticulously to ensure we're meeting these targets. At the end of each month, we issue an invoice that reflects the actual work completed versus the planned figures. The consultant, having a permanent office on site, reviews our progress daily and approves our monthly submissions based on what we've actually achieved.

If we find ourselves not meeting a month's targets, it's imperative that we catch up in the subsequent month. This is crucial to prevent penalties at the project’s conclusion, as contracts often stipulate fines for delays, sometimes up to 10% of the contract value.

Continuous engagement with the consultant throughout the project helps to manage and mitigate any unexpected challenges that weren't initially covered in the contract.

Regulatory Environment in the UAE

The UAE follows IFRS compliance requirements, which affects financial audits. The introduction of VAT in January 2018 was a significant change; previously, there was no taxation. Now all UAE companies need to ensure timely VAT returns — monthly for larger groups and quarterly for smaller companies. The Federal Tax Authority (FTA) informs us of the schedule during registration, whether the VAT returns are due monthly or quarterly, which depends on how they've distributed the quarters among companies.

The UAE is also introducing corporate tax. This year ending December 2024 will be the first year for all the companies for the corporate tax. And we have nine months after that to submit the final corporation tax along with the financial statements of the company.
In preparing and booking transactions, we must ensure that invoices are correctly detailed, with no alterations allowed. Training our finance team to accurately record and handle invoices is essential to avoid any potential discrepancies that could lead to penalties during regulatory reviews. Because of the refunds which are common in construction, there is more chance that we'll be subject to the review from the authorities. So, accounts should be appropriate and ready all the time.

That is where my accounting system steps in. It is designed to generate required information in the format specified by the authorities, which facilitates easier and quicker compliance.

The Role of Technology in Construction Finance Management

We use specialized construction software that is customized to meet our specific needs. This software facilitates real-time reporting, allowing me to monitor the progress and financial status of any project at any given time. It features comprehensive dashboards where I can view critical data like project costs, billing, project profitability and so on.

The system is set up so that I enter the complete budget for a new project on day one, and it continuously monitors each line item against this budget. If expenses exceed the budget, the software triggers an alert and prevents the issuance of further purchase orders until the issue is addressed. My project management team must then provide justification, typically in the form of approved variations by the consultant, before I can adjust the budget accordingly.

This software is essentially ERP-based, customized to fit the unique requirements of each company. It's difficult to recommend a specific software universally because each organization’s needs differ. For startups or smaller companies looking to minimize costs, simpler, more cost-effective software might be sufficient initially. Over time, as the company grows and requirements become more complex, they might upgrade to more sophisticated systems.

For example, when my company started in 1993, we used a very basic software. By 2013, as our needs grew, we upgraded to a more advanced system that could handle all our requirements, including further adjustments for VAT compliance introduced in 2018. This upgrade ensured our software remained compatible with both legal and financial requirements.

How to Choose a Finance Management Software

Having access to information regardless of location — whether I'm at home, in the office, or out of town — is essential. The ability to obtain all necessary details from our finance module without involving other people is crucial for efficiency. So, if the current software I use meets these needs and can handle our specific requirements, then I am satisfied with it.

For instance, when VAT was introduced, rather than switching to new software, we updated our existing system to accommodate the new reporting needs. This approach avoided the costs and delays associated with purchasing new software and training staff, which can be significant hurdles for a company to overcome.

In terms of specific tools or software, it's difficult to recommend one particular name because what works best depends heavily on the company’s unique needs. Any ERP (Enterprise Resource Planning) software that aligns with your specific requirements and supports timely, informed decision-making should be considered. The key is reliability and the ability to deliver correct and specific information pertinent to the project.
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How to Embrace Innovations Smoothly

Innovation in finance management is essentially about continuous learning and adaptation. Here in the UAE, we use the International Financial Reporting Standards (IFRS) for our accounting processes, and staying updated with these standards is crucial. Recently, there was a significant update with IFRS 15, which specifically pertains to revenue from contracts with customers. It's important for us to adopt and integrate these updated standards to ensure compliance.

For successful implementation of such innovations, having a strong and qualified team is vital. If the team is well-prepared and knowledgeable, adapting to new innovations or changes in the finance landscape should not be a problem. This readiness ensures that we can quickly embrace new methods and technologies that enhance our financial management capabilities.

Top Financial Management Strategies in Construction

Cash flow management. This is a foundational strategy, focusing on monitoring and controlling the inflow and outflow of cash throughout the project's life. We prioritize cash flow management above all to ensure smooth operational continuity.
Realistic budgeting. Setting a realistic budget from the start is essential because it guides the entire project.Therefore a qualified engineering team needs to ensure that budget is covering all aspects of the project before it’s finalised and given to the finance team and related management as a monitoring base. We rely on this budget throughout the project’s life.
Forecasting and schedule management. These strategies are intertwined, helping us anticipate financial needs and manage costs effectively before the project begins. Accurate forecasting aids in aligning project timelines with financial expectations and preparing for future costs.
Risk management. As the project progresses, it typically involves more expenses, especially when we procure high-value items in later stages. Initially, we might secure favorable pricing from suppliers. As risk management measures, we arrange credit terms with our suppliers to avoid upfront costs. And it brings us to the next strategy.
Supplier relationship management. Establishing long-term credit terms and meeting these commitments on time are essential to sustaining good relationships with suppliers. This strategy not only helps in managing costs but also secures a reliable supply chain.
Stakeholder engagement. We maintain strong relationships with stakeholders through continuous engagement and regular social gatherings, like Ramadan parties, annual dinners etc. Sometimes, even body language during these meetings can provide significant insights that are crucial for our ongoing strategies.
These strategies collectively contribute to the company’s reputation in the market that is essential for long-term success in the market.

Case Studies

Surviving During a Crisis

During the global financial crisis around 2008 and 2009 markets worldwide collapsed. Many companies closed overnight due to inadequate financial management and lack of preparation for such an extensive crisis. Our company, however, not only survived but also managed to secure new projects during this period. We were proactive in managing our finances; we were prepared when many others were not.

Here is what we do to survive any crisis:
We maintain sound relationships with suppliers by ensuring prompt payments. It makes us a preferred client during tough times.
We secure facilities with our banks which allows us to access funds when needed.
We’ve been investing continuously in assets like properties, warehouses, and fleet camps as a separate line of business. So, during a recent cash flow challenge, instead of looking here and there, we just liquidated one of the properties to satisfy our financial obligations.
While managing projects, we sometimes buy materials at the client's request, which are charged to them but remain unused due to changes in design and specifications made by the client after purchase. These unused materials represent a saving for us and are reused across various projects.

Collection from Clients

One significant challenge we often face is the delay in collection from clients. Over the past four to five years, we've learned to manage this by leveraging our strong relationships with banks and suppliers. To mitigate the impact of delayed payments, we secure a specific overdraft facility from the bank tailored to each project. This facility is designed to finance the project for a period of 18 to 20 months, providing us with a financial buffer and ensuring that we can meet our obligations even when client payments are delayed.

Moreover, we always communicate any potential delays to the project consultant to ensure that these are not counted against us. We maintain meticulous documentation of all communications regarding delays through emails and formal letters. This documentation is crucial in case of any litigation or arbitration, allowing us to be compensated for delays caused by external factors.

Dealing with different types of project owners also presents unique challenges. Working with established companies, where mutual due diligence is possible, generally ensures smoother operations and financial transactions. However, projects with individuals, who might not have a formal business structure, pose higher risks. We've experienced situations where despite completing projects, we struggled to collect final payments, leading to financial losses. These experiences have taught us the importance of cautious engagement and thorough vetting of potential clients, especially when dealing with single owners.

Tips for Optimizing Finance Management in Construction

Make sure you have a strong project management team. The strength and qualifications of the team are crucial, especially in the UAE where finding properly qualified accountants can sometimes be a challenge. A strong team helps in making informed decisions, raises flags wherever they feel identifying potential issues early on.
Maintain constant engagement with the site team. They are on the ground and understand the day-to-day realities of the project. To facilitate this, we hold regular meetings with all project engineers twice a week, for two hours each. These meetings are dedicated to discussing challenges and preparing for upcoming needs, ensuring that operations run smoothly without delays or stoppages. And we remember that delays are particularly costly, not just in terms of potential penalties but also due to ongoing operational costs, like staff salaries and site facilities, which all add up if a project overruns its timeline. Therefore, our goal is always to complete projects on time, efficiently, and with optimum quality. And communication is of vital importance here.
Consider team restructuring and training. In terms of team structure, we have specialized teams within the finance department to handle specific areas: banking and cash flow, supplier relations, subcontractors, payroll, and procurement. I have allocated each team a separate task. And each team reports back to me several times a day with their challenges. I've trained them to manage most issues independently, but I step in when complex problems arise.
This approach to project and financial management ensures that each team member is focused and effective, contributing to the overall success of our projects. The construction market is dynamic, with varied challenges that differ by project, client, and supplier. Continuous learning and adaptation are key to our success.

Personal Insights for Finance Managers

My advice for anyone looking to excel in finance management, whether you're starting as a finance manager or working to enhance your company's financial operations, is to always stay focused on your role. Finance is a broad function, and one cannot manage it alone; the support of a strong team is essential. You should continuously assess your strengths. And more importantly, weaknesses or threats in your financial role. Strategically leveraging your strengths and opportunities is key to mitigating potential threats and weaknesses.

For a finance manager, it’s crucial to have a comprehensive understanding of all information that directly impacts your financial responsibilities. Make sure you have timely and readily available information so that you can proactively manage day-to-day challenges and make informed decisions.

From a practical standpoint, maintaining a 360-degree perspective is vital because you will be the primary contact for your management concerning financial issues of the projects, not each member of the team. So, if you have all the information and can provide comprehensive and accurate answers to your boss or owner, you are successful.
Finance Manager at AL Memzar Contracting LLC
A qualified fellow member of the Association of Chartered Certified Accountants (ACCA) with over 19 years of experience in audit and advisory across Asia and the Middle East. Currently a pivotal finance team member in the construction sector a strong track record in project financial management and deep expertise in IFRS, IFAC, and ISA standards.
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