Invoice in, invoice out
On most projects, we collect a down payment of roughly 5% to 10% of the total contract. We also collect one payment at the start of the project. If we order custom cabinets or other expensive custom materials, the down payment increases to ensure we don't eat that cost.
After that, we send invoices based on our job cost reports. On a weekly basis, we enter incurred costs into the system, and we review the job as far as what's been collected vs. expenditures, factoring in labor, materials, and our margins. When we see that expenditures are close to what's been collected, then it's time to send another invoice. That could mean we send invoices as close as a week apart, depending on when invoices come in to us.
We let customers know up front that we're going to bill them as we're being billed. Typically, we stay just a little bit ahead of the game. We're making our margins as we go to cover our overhead and our profit.
Pay as we go
Our goal is to build the project with our customers' money rather than our own. As we're incurring the expense, we expect to be paid. This way, we never spend our own money on the project. But I don't think we should ever have too much of the clients' money. We're not trying to stay ahead of anyone's dollars. They should be paying for what they receive as they're receiving it. Clients feel better knowing that we don't have too much of their money. They expect us to profit, but they want a comfort zone.
Fred Bueler CKD, CR
Des Peres, Mo.
Tie it to the progress
We collect from our clients using a payout schedule based on project milestones. We look at what would be good, definable milestones over time and break out the total cost evenly over those periods.
We collect 10% when they commit to the project, 10% when they sign the contract, and another 10% at the start of the project.
After that, we might collect 15% when we finish rough framing, then 15% after we finish mechanicals, and so on. The final payment for substantial completion is usually about 8%.
This method allows us to accumulate cash early on, so we're not financing the project. When we start the job, we've got 20% or 30% before we've spent anything. We're not looking at what we've paid and what we've not paid, but the money is there to pay for the project as the bills come in.
At any time we're probably 10%, 15%, or 20% ahead, so if something does happen, we've got a little time to figure out what we're going to do.
With this method, the clients know when and what they're going to be paying out. To eliminate subjectivity, we try to set the milestones around events that involve a third party. For example, completion of mechanicals is defined as the rough mechanical inspection, so we've got a third party defining completion. Substantial completion is defined as the securing of an occupancy permit. Then there are only punch list items left to do. By that time, only around 2% of the contract is at risk.
Lake Bluff, Ill.