Built to Build: Blog
HOW TO MAINTAIN POSITIVE CASH FLOW FOR YOUR CONSTRUCTION PROJECT
ARE YOU FINANCING YOUR CLIENT’S JOB FOR THEM?
If you’re like most contractors, you have financed a customer’s job at some point. You’ve spent more money on producing and managing the job than the money you have received from the customer.
When the projects were small, this wasn’t that big of a deal. You may not have even noticed you were doing it.
But then it happened. The bank account got low, and you realized you had to complete the next phase of work before you could invoice for the next progress payment.
When this happens, you are financing the job.
FINANCING PROJECTS KEEPS YOU TRAPPED IN THE CRAFTSMAN CYCLE™
Cash flow management in your large construction project is extremely important. Financing the job costs you money, limits your cash flow, and causes..
And when you experience stress, you’re more likely to make bad decisions in an attempt to find more money.
You’ll stop paying yourself, delay paying your subs and vendors, and throw together estimates on new projects because you’re chasing those new deposits.
This is classic Craftsman Cycle™ behavior – PRICE WORK, GET WORK, PRODUCE WORK, FIND WORK.
(You can read about how to break The Craftsman Cycle™ in my book, Profit First for Contractors.)
INSTEAD: BILL EARLY, BILL OFTEN, DON’T BE THE BANK
There’s nothing wrong with financing your customers’ job as long as you charge them for the costs of financing.
Banks do it all the time. That’s how banks make money.
There are many companies out there that partner with construction businesses to provide financing for your customers.
And they charge you a fee for this professional service, which in turn, you include as part of the job costs, which your customers pay.
But if you don’t provide financing options to your customers, and you finance the job on your own, then you are acting like a bank – a bank that is giving out free money.
Here are three simple rules to follow when designing the project payment schedule. These will ensure you have positive cash flow management in construction projects.
Rule #1 – Don’t Be the Bank
Get a deposit before you start the job, and make sure the deposit is enough to carry you through the next progress payment.
Every state is different when it comes to the amount you can charge for a deposit on a construction project. Make sure you are familiar with the laws in your area, and charge the appropriate deposit BEFORE you start the job.
NOTE: On most commercial projects, the contract may not allow you to charge a deposit before you start the work. You may have to wait thirty days or more after you have started work to bill for the work in place. This is called financing the job, and it costs you money. Include the cost of this financing in the job if you want to ensure positive cash flow management in construction projects and make a profit.
Rule #2 – Bill Early
There’s usually a period of time between the day you send the invoice to the client and the day you receive the payment.
If you use online payments, credit cards, or other digital forms of payment, this time period can be greatly reduced. But many residential contractors wait for weeks to receive a check.
While you’re waiting on that check to come in, you produce more work.
You can offset this “waiting period” and the work that is produced during that time by billing early.
Here’s what I mean by “billing early.”
Let’s say that, on average, it takes two weeks to receive a check from your customer. Prepare your invoice for the amount of work produced and in place at the time of the customer actually writing the check, not the amount of work produced and in place when you prepare the invoice.
I know it seems like a minor thing, but it only takes one missed check to hamper your cash flow management in construction projects.
By the time your customer receives your invoice, reviews the details, and inspects the work, you will have produced the amount of work shown on the invoice.
NOTE: Now I’m not saying that you should ever bill for work that you haven’t done, but “billing early” is to make sure you are receiving your money in a timely fashion.
Rule #3 – Bill Often
Don’t create a cash crunch with the payment structure listed in your contract. Make sure your payment structure follows your project’s production schedule.
Many residential contractors use a 30/30/30/10 payment structure. That works on smaller projects, but causes problems on larger ones.
I recommend going to a “Bill Often” payment structure for large projects.
Discuss with your customer a bi-monthly (every two weeks) or monthly payment structure. Bill them based on the progress of the project instead of phase completion. It’s the same money, but in a more consistent manner.
PRO-TIP: Never set your payment structure at the completion of a major phase you can’t control. Always design your payment structure for the start of a minor phase you can control.
If you have a progress payment defined in the contract upon inspection of the MEP rough-in, but you can’t get the inspector(s) to show up once you’re completed, then you’re screwed. You can’t control the inspectors’ schedules.
Instead, design a progress payment at the start of MEP rough-in – something you can control.
BONUS POINTS: Always make your invoices “Due Upon Receipt.” Put that language in your contract and tell your customers why.
THE WHY – You’re not a bank (Rule #1)
YOU’LL BE PUMPED TO TAKE ABOUT MONEY WITH YOUR CUSTOMERS
Cash (profit) is the life-blood of your business, and maintaining positive cash flow in construction projects is the oxygen you need to run the race of owning a profitable construction business.
Take the time to plan ahead and design a payment schedule that matches your production.
Explain to your customer the importance of the payment schedule, and what it means to them.
If the cash stops. The work stops.
You don’t want that to happen. Your customer doesn’t want that to happen.
Update your customer each week with the progress you’re making, what’s coming up next, and remind them of the next payment due.
Follow these three rules and you’ll have happier customers, better cash flow, and be able to sleep better at night knowing there’s money in the bank.
And that bank is not you.
Don’t be the bank. Bill early. Bill often
GET THE CONFIDENCE YOU NEED TO BECOME PERMANENTLY PROFITABLE
If you are struggling with cash flow management in construction projects, and you need to develop the systems to streamline your construction business, then you need to apply for one of my coaching programs.
I will teach you a six-part framework that will make you as confident in your construction business as you are at your craft, and you’ll finally be able to work on your business instead of in your construction business.
You’ll make more money, stop worrying, and get your life back.
Click here to apply for a coaching program, and my team will follow up with the next steps.