It’s important to manage the payment schedule on your jobs, but not all jobs are the same. We received this question recently:
“I do mostly remodel work. In your book you talk about getting a final payment of only 2% of the contract. How could I do this on small jobs like roofing (only takes about 4-5 days)? or other smaller jobs. I would have to ask for almost all of it up front or somehow do a progress payment after 2 days? I find this to be a hard sell. Do you have any suggestions or ideas? Thanks.”
On small jobs, you should get at least three payments: a down payment with the contract, another payment the day the job starts, and a final payment the day the job is completed. The size of each payment will vary depending on the size and length of the job, but you want to have received most of your money before the final payment. This means that if you’ve scheduled three payments on a job, when you receive that second payment, you want to have recovered all of your job costs and overhead expenses, and preferably part of your profit.
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Having a small final payment is important because clients sometimes think it’s okay to withhold the final payment for a multitude of reasons. If they only owe you a small amount for the final payment, if needed you can walk away without being financially hurt, rather than wasting time and money on litigation.
I can give guidelines, but only experience can teach you what is right for you and your company. For example, let’s say you have a small job of $3,159. A job that size could be done in a day, or it might take a week to build. How much money do you need to cover your expenses for the first few days? That’s your down payment.
Now look at the remainder of the job. How long will it take to finish? How much should the second payment be to cover the expenses for the rest of the job so the most I can lose is my profit and maybe some of my overhead expenses? Think it through. Often a payment schedule of 45% – 45% – 10% will get you good numbers for the job.
Now if the job is going to run more than three or four days, maybe you need to get an additional payment in there somewhere. If the job is going to run more than seven to nine days, you should probably get a down payment, a progress payment on the first day of the job, another on the first Friday of the job and the balance on completion.
Include incentives in your payment schedule. If they make payments on schedule, including the final payment, offer a discount for paying on time. Be careful how this is worded: you won’t increase the price if they pay late, you’re offering a discount if they pay on time. Check your state usury laws and you will see why this wording is so important. This type of incentive pricing will make sure you get paid when the job is done and you won’t have to listen to excuses on why you should wait for your money. Of course, include interest charges in your contract in case the final payment is late, if you can legally do so.
Your payment schedule isn’t something you should be selling to a potential client. You’re writing the contract and you’re the one taking the risk, so it’s fair for you to set the payment schedule. If a potential client wants to argue about your payment schedule, consider yourself warned that you might be facing a problem with this client.
Small jobs add up just like big jobs. Protect your client by doing what you say you’ll do, when you say you’ll do it. Protect yourself by making sure you get paid for it.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.