HOW TO MAINTAIN POSITIVE CASH FLOW FOR YOUR CONSTRUCTION PROJECT
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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.
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Noah: That’s awesome. Thank you very much.
Yeah, man. No, this is a good call. I think I just, I might take this one and just take the audio out and make it a podcast or something. This is [inaudible 00:00:09].
Everything is awesome. I’m very pumped for my meeting.
Yeah. Well, send me a text after the meeting. I want to hear how it goes.
Yeah. I will do that. Cool.
When was the last time you were pumped to talk about money with your client? Well, if you’re like most construction business owners, talking about money with your clients causes stress. The reason this is stressful is because you’re probably financing your client’s projects. You’re strapped for cash and you need that next progress payment. You’ve performed the work and now you’re waiting on the money from your client to pay for the work already in place.
Well, when you started your construction business, you didn’t even realize it, you were financing the job because the projects were small, so the stakes were small. But now that your business is growing, you realize you can’t afford to finance your client’s projects anymore. You realize you’re not a bank. That’s exactly what my client, Noah, realized when he was developing a proposal on a large project. He realized the 30-30-30-10 billing structure he had been using on smaller projects, well, it’s not going to work out so well on a larger job. Watch the rest of the video to learn how to maintain your cashflow on a large project. You are not a bank, so stop acting like one.
Check out the rest of the video and learn how billing early and billing often will make you pumped to talk about money with your clients.
Oh, one question I was going to ask you about for this job is like on my normal jobs, they’re like 40,000-ish, is what we’re averaging right now. So those, I just break up into four parts for a bit for the payment schedule, 30, 30, 30, and 10. If this job ends up being in the 400,000-ish sort, even if it’s 100,000, it seems like I should … Should I be billing more often?
Noah: Than the 30-30-30-10?
Noah: And should I just do it tied to milestones? Is that the best?
No, I just, I would tie it to your weekly progress. I would tell them normally, we do a payment schedule of 30-30-30-10. That’s pretty standard. For these types of projects, we’ll probably have to do something a little bit different, just because of the detailed nature of it. Once we get it planned out, we’ll know what our budgets are, where our contingencies are, and what we think we’re going to spend on this thing.
In order to get started, we’ll probably do a deposit for one month. For example, if this is a six-month project, one divided by six is 16%, so it’s under 20%. It may be a little bit less than you normally would take on a bigger project, but it’s also a bit … 16% of $100,000 is still a good chunk of money.
That’ll get us through the first, what we think is the first month, right?
Noah: Correct, yep.
And that would be about 16, say 15 to 20%, but we don’t know. These things can go kind of slow. Before we get through that deposit money, then we’re going to give you another invoice for the next week. Meaning, let’s say that I’m working up through Friday and that’s where we hit our 16%. Next Friday, we’ll be another 5% complete with the job.
Noah: I see. Okay.
I’m going to bill you every week for our progress.
And we’re going to bill out about a week ahead. The way it’s going to look is you’ll pay about a 20% deposit up front. Then when we work, as we get through that 20%, and we’re estimating that’s probably about the first month. You’re not going to see another invoice for about three weeks. Then on the third week we’re going to bill you for the following week. That’s the way that we can progress through, we make sure that everybody’s caught up, and everybody’s being paid, because we can’t finance the job. We’re not financing the job, right?
And we don’t want you to pay because there are going to be so many unknowns in this thing.
We’re trying to protect both people. Then you ask them, “Are you comfortable and do you want to write a check every week?”
If not, then we can go to an every two week invoicing structure, but it’s still going to be based on the progress. And most people are like, they don’t want to have to pay a check every week. But what you’re trying to do is saying, “I’m willing to just get paid in smaller amounts, but it’s going to be more frequent. Is that convenient for you?” And they say, “Gosh, no. I don’t want to. I’m busy.” I’m whatever. I’m going to miss something or whatever. Say, “Okay, we can do two weeks, but they’re going to be a little bit bigger and so you’re going to get that invoice this week, and it’s for what we’re projecting where we’re going to be by the time you write the check and it gets back to us.”
Noah: Right. That makes sense.
We’re going to bill a little bit ahead, but not too far. Just a few percentage. Just a few days’ worth. Not 30% of the job, then another 30% of job. In these type of jobs, that’s the best way. And he might say, “Well, I’d rather do a 30-30-30-10.”
Great. No problem. 30% up front, and still, the same thing. After the first month, another 30%, but that’s only for quoted stuff, you know?
You’re going to have the other stuff, the hourly stuff that comes up. So it might be a little bit easier if you just prepare them like every couple of weeks.
And it depends on the job. You might want to say part of this job is to have an onsite meeting with them so you can update them on the progress and you can hand them an invoice every two weeks.
Noah: Yeah, got it. Okay.
And I would write the contract, you have something like that saying 20% deposit and then bill upon progress every week or two weeks, and you talk about that and make that decision.
You are not a bank, so don’t act like one. Bill early, bill often, and make sure you design a progress payment structure that serves your construction business. If you want to learn a framework to streamline your construction business and create the systems to increase your profits, reduce your stress, and get your life back, then apply for a coaching program today. Go to shawnvandyke.com/apply and fill out the form on that page. My team will review your application and will follow up with you with the next steps. We will get you plugged in to one of our coaching programs so that you can stop worrying, make more money, and get your life back. Apply for our coaching program today at shawnvandyke.com/apply.
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Shawn Van Dyke is a construction industry consultant, business coach, and mentor to construction business owners. He is a Brand Ambassador for Fine Homebuilding, travels across the US as a keynote speaker, seminar presenter, and the author of two books – Profit First for Contractors and The Paperwork Punch List: 28 Days to Streamline Your Construction Business.
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