Are you looking for a better billing method? Billing against a schedule of values (SOV) is standard procedure for large, commercial contractors, but is often misunderstood and infrequently used by residential remodelers. Many small businesses fail, often from a lack of cash flow. Implementing an SOV as a contractual and management tool can help.
The SOV is a defined list of work with assigned values. One option is to break a job into trade-specific milestones, each with an assigned dollar value. It should be based on an accurate, detailed estimate, but you can front-load the schedule as necessary to cover deposit, mobilization, and long-lead items for which you may have to place deposits.
This tool puts you in control of the construction process. It can help manage and forecast cash flow, track progress, set goals for field crew, and reduce client interpretation on accounts receivable.
CRYSTAL CLEAR An SOV, in conjunction with a good construction agreement, helps protect your financial and legal interests. When an SOV is part of the construction agreement, the value for installed work can be clearly stated and is thus agreed, in advance, for the duration of the project.
If a party terminates or defaults, the value for installed work — having been agreed on in advance — is easier to identify and therefore reduces liability and the need for costly evaluation in any potential negotiation, mediation, arbitration, or litigation. Further, it reinforces your rights to collect on unpaid balances and can serve as supporting documentation for mechanic's liens or legal action. It also protects the homeowner by making it easy to identify amounts that may need to be credited for uninstalled, incomplete, or defective work.
Success is in the details. Many small contractors use ambiguous wording or intermingle trades in their payment schedule. Phrases such as “due when framing is substantially complete” or “due at completion of drywall and start of tile work” can box you into a corner and shift interpretation of the payment schedule squarely into the lap of the homeowner. A payment schedule item that lumps together concurrent but distinct trades — “$50,000 due when granite countertops are installed” — opens the door for a construction-weary client to withhold payment for both cabinets and countertops because of an issue with the granite.
Bank jobs. On financed jobs, many banks require, and will approve, the attached SOV when modified for a specific project. Check with the lender before ratifying a construction agreement.
Fighting the issue. A common response from remodelers is “by stating values for installed work, we have to share cost breakdowns, which makes it easy for clients to figure out our markup.” It is true that an SOV can create more transparency on your markup. But, most clients for larger remodeling projects own businesses or are employed in executive or managerial positions and might appreciate a frank discussion of gross and net margins. Being specific can help avoid conflict.
Bill regularly. Agree in advance to either bill for work as items on the SOV are completed or at regular intervals. For larger companies, it may make sense to bill monthly. For smaller companies, being able to bill for the HVAC rough-in can ensure that cash is available to pay a subcontractor in a timely manner.
It's not always a matter of company size. It may have to do with the client. Upscale clients are busy, and frequently travel or live in another city or state. Making it clear that you need a check for completed work on the first day of every month or at some predetermined interval makes it easier to collect the money and helps clients plan their finances.
Goal setting. Consistently billing against a good SOV creates a default paper trail showing job progress and percentage of completion. For example, job progress can easily be tracked monthly if the job is billed monthly. And when a project advancing at 15% completion per month suddenly only progresses 5% in a given month, it raises a red flag that may give you time to react to a slipping schedule or other important issue.
Consider having project managers submit a copy of the SOV to your accounting department at the end of each month. Crossing off completed tasks will help them feel productive, and highlighting items to be completed in the next billing cycle helps set clear goals.
Established systems/procedures. The SOV can be used to ensure that you or your project managers follow through with your company's systems. You may require that an electrical or close-in inspection occurs with a client sign-off; if so, make it a line item on your SOV and you will receive a check for conducting the requisite meeting. If there is a form associated with the event, make delivering the form a condition to invoicing and receipt of payment.
Setting up your SOV. Use specialized trade work and indisputable milestones to maintain control. It may help to talk to an accountant, your project managers, and possibly your lawyer if it involves changes to your contract.
Paul Irwin is owner of Pattern Builders, based in Takoma Park, Md.