If you want positive cash flow in your construction business, make sure you’re using the right payment schedule on your contracts.
Your contracts should have a clearly outlined payment schedule, listing the down payment, all progress payments and a final payment, due on day of substantial completion of the job. Progress payments should be clearly scheduled at the start of a work phase, not at the completion of that work.
Your down payment should range from 40% on smaller jobs to 20% for larger jobs. Progress payments should be scheduled about every two weeks. Your last progress payment and your final payment combined should equal one of the previous progress payments. The final payment should be about 2% of the sales price and due on the day the job is substantially complete.
Your contract should clearly state that you do not bill or invoice for jobs. The payment schedule is in the contract and if it is not followed, you will shut the job down. Now, if they are late, give them 24 hours to make a payment. You are not a bank or lender and are under no obligation to finance their project. By the way, if you set a payment schedule but don’t enforce it, by default you are agreeing to whatever new payment schedule your client might decide to use. Set the payment schedule, and enforce it.
If you work in a state that dictates payment schedules, then you need to work out how you can arrange your payment schedule so that you can keep your bills paid. Some contractors use a 1/3, 1/3 and 1/3 payment schedule, but that leads to a negative cash flow. Before the second payment is made, you’ve already spent more than 1/3 of your job costs, which means you are working out of your pocket. And by the end of the job you’ve spent far more than 2/3 of the price of the job (for job costs and for overhead), which means you are in a hole financially until your client makes the final payment. And if they decide to play any games with that last payment, you’re in trouble. Stagger payments so that the cash flowing in more closely matches the cash flowing out.
Never agree to a retainage clause in an agreement. Retainage clauses are a blatant attempt to get you to finance part of the job. This myth that they need to hold your money to make sure you come back and fix anything wrong isn’t true. Every state requires you to guarantee your work. If clients hire legitimate, licensed and bonded contractors, they are protected.
Payments are how cash flows into your company. Schedule payments properly, and you’ll have positive cash flow on every job.
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.
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