by Ken Smerz, as seen in LiDAR Magazine, published March/April 2016
Cash is King!
No kidding, but when I can’t get my clients to pay for the jobs we deliver in a timely manner, that’s a significant issue for expenses…and little things like payroll. We actually have a chart we use to forecast accounts receivable versus costs, with intersecting lines that project when we are expecting to run out of cash. And there have been many times when it’s made me nauseous.
Recognizing this as a significant growth issue, here are some things we’ve implemented to address my indigestion.
- Pre-lien all jobs. If you are unfamiliar with this process, simply put it allows you the ability to file a Mechanic’s Lien on a project. A Mechanics Lien is the second most powerful type of lien right behind an IRS Lien, so it can be the real deal. Conceptually, all you’re doing is notifying the client and owner of the property that you are securing the right to file a lien in the event you don’t receive payment. This is a very valuable tool and can provide significant leverage to get you paid on a project. [If you email me I’m happy to have a deeper conversation.]
- Get a percentage of the project fee in advance. This is a routine concept in construction and yet I don’t think many service providers even ask the question. Set a limit (i.e. all projects greater than $25k) and require a mobilization fee of 20-40% in advance of providing the deliverable. Even if you don’t get the client to agree, it creates expectations between you and your client about getting paid—which is a great conversation to have.
- Progress payments on large jobs as you progress through creating the deliverable is another way to get your cash in hand more quickly. Communicate properly up front with the client on any project that will take several months to complete and schedule payment for producing/delivering segments at the milestones. Subcontractors do this routinely and there’s no reason you can’t have your GC/architect treat you similarly.
- Avoid “pay when paid” clauses in contracts. These are typically baked into a contract for a subcontractor who has a more significant capital commitment on the project.
- Position yourself not as a subcontractor—but as a supplier. Material suppliers (concrete, screws, etc.) get paid much more quickly because they usually demand it. Furthermore, they don’t work off contracts at all, but typically from a purchase order system. Encourage your clients to work with you from a PO# basis, and not a subcontractor agreement.
- Pick up the phone—or have someone in your office do so—and call the client immediately when you are expecting to receive payment. Do not wait, or feel uncomfortable talking about money that is owed to you for work you completed. I hear people complaining about not getting paid who are intimidated to make the phone call until it’s a problem. When done correctly, this collection call can turn into a sales call because you’re building the relationship. Assign someone to make weekly calls.
- When the guy who owes you money starts asking you to “work with me…I have another giant project I want to use you on…”—that’s bullshit. I’ve been in the contracting business all my life and have never seen this happen. In fact, any good business person should take this as an immediate indication that something is wrong. And I’d bet your client is going to expect you to write-off some portion of the money he owes you. Smile back and sound excited, but don’t believe it.
As always, I appreciate any comments/feedback you might have and can be reached at firstname.lastname@example.org
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