A Simple Strategy For Payment Schedules That Create And Protect Cash Flow
Contractors are forever complaining that they don’t have adequate cash flow when producing projects. More times than not they blame this on their customers, citing that the customer is holding back or delaying progress payments. If a contractor keeps working without getting paid he or she has no one to blame but themselves.
Consider these questions.
Will Delta Airlines let you pay after you land? Will Dell Computer let you pay for a custom computer after it’s built? Of course they won’t! So why do contractors find themselves financing projects for their customers and then end up waiting and even begging for their money?
Protect your cash flow before you sell the job!
On February 26th, as part of a six workshop program, I’ll be leading a strategic estimating and proposal creation workshop for contractors titled: “Know What You’re Selling Before You Sell It!” One of the topics I’ll be covering in that workshop is how to write a project payment schedule that creates and protects cash flow. I’ll also be explaining how that same payment schedule, if explain correctly to a prospect, will help a contractor sell the job.
Below is a brief summary of how to do it and what I will be sharing more about with the attendees. The attendees will then be encouraged to try the strategy when estimating and selling their next project. They can then come to the free lunch and learn session scheduled before each next workshop for help with any questions or challenges they experience implementing the new strategy.
10 Steps to create and protect cash flow:
- Estimate all tasks in critical path order (same order you would actually build the project)
- Group tasks to establish easily definable (for the contractor and the property owner) project and payment milestones
- Add up all direct costs the business will incur between milestones and include overhead and profit
- Establish payment amounts based on the total cost of the milestone (Including overhead and profit) plus add some money to each to maintain frontloading for safety (you’ll make up for the frontloading when establishing the final payment)
- Word payment schedules so each payment will be due prior to the start of each milestone
- Collect the money needed to finance all of a milestone’s tasks before you start it (don’t be Wimpy on this!)
- Get a significant amount of the outstanding balance at the second to last payment
- Make sure the project cannot be used for its intended purpose until after the second to last payment is received.
- Make the final payment due on “Substantial Completion”
- Make sure the final payment is far less than your expected net profit but a comfortable amount for your prospect