Our remodeling company was located in Oakland, Calif. Over the years that we ran the company, one of the most challenging state laws we had to abide by was one declaring that the most a contractor could ask of a client as a deposit when signing a contract was $1,000 or 10% of the total price, whichever was LESS!
In other words, if you sign a $600,000 project the most you could get for a deposit was $1,000. That is so different from what most other states allow.
So, how do you run a project under those terms without having large sums of capital to draw on? Here is what we did.
Products with the longest lead times had to be ordered weeks or months before they were needed and before the project started. After the contract was signed and the specifications for things like cabinets, windows and doors were decided upon, we would invoice the client for 50% of the burdened costs for those products. By “burdened” I mean the markup—the gross profit dollars that the company needed to make on that money.
The supplier might not need a 50% deposit to get started. However, we needed to be building a cash reserve for this project.
Our partners knew what we were dealing with. We would provide a deposit to those who insisted on one when the contract was signed but we had to negotiate so the amount was as small as possible.
What we might do is set up a 10% deposit at contract signing, 50% at completion of the rough work and 30% at completion of the finish, with the final 10% contingent on us getting ahead of the costs of the project sooner than later. In other words, we were sharing the burden with our partners.
One of the wrinkles of this law was a contractor could not charge for work which was not done or products not installed. I didn’t know how to follow those restraints and still be in business.
We set up a schedule with a payment due every two weeks in which the amounts owed looked like a bell curve if you were to plot them on a graph. The biggest payments were due in the middle of the job because, as I would tell the client, that is when the most money is being invested in their project.
The final payment was 5% of the total price, due at substantial completion, which is when the project can be used for its intended purpose.
More often than not our clients accepted this schedule. If someone wanted to hinge the payments to progress points, we would mesh our construction schedule and the two-week benchmarks, linking the start, not the completion, of a phase to a payment. We never got pushback on that.
With these constraints to be managed it was very important to stay on schedule.
The schedule was looked at daily. Our production manager would review the schedule with the lead carpenter weekly. We were looking for ways to get done sooner than we had promised to, as doing so would bring more money into the company earlier.
No Pay, No Work
It was also important to get paid on time. We followed that schedule, too. If a client did not pay we stopped working. I remember back in the day when we would keep on working even if we had not paid, hoping things would get better. They never did.
Despite the lack of deposit money, we did well using these tactics. Many industries and other types of businesses operate with similar constraints.
The key is to have a way of doing business and stick to it. If a potential client does not like your way of doing business, let them go make your competition miserable.