3 Easy Ways to Protect Your Subcontractor Cash Flow
Posted on June 19, 2017
By some accounts, subcontractors handle 80% of the work on construction projects. But, they get a lot of risk pushed down to them, including risks that directly affect their cash flows. These three strategies, will help you keep your cash flow in the black.
Get secured for payments
Construction project participants put a lot of trust in each other. There are few industries where so much work is performed without payment in advance, and where people wait for large sums of money. There are all sorts of ways to deal with those who don’t pay you, but none of them are convenient, or quick. So it’s best to preserve your last line of defense for when all else fails — your right to lien. In doing so, you also set yourself up in a secured position for payment, and improve your cash flow.
You do this by sending a preliminary notice to the appropriate parties of the contract. The notice informs the owner, and perhaps others, that you are performing work on the project and that you will file a lien on the property if not paid.
It’s unfortunate, but states have different requirements about whom to send notice, when to send notice and how to send notice. On top of that, it’s vital that you provide preliminary notices within the time specified by the relevant state. This guide, will give you an idea of the lien requirements for all 50 states, along with the requirements related to preliminary notices for each. Be sure to check with legal counsel, or with your state officials, to get the most up-to-date information on filing preliminary notices.
Once you file your preliminary notice, you will go on the owner’s and GC’s list of people to pay first. This is especially valuable for you when there are payment problems arising from things other than your ability to perform.
Front load the schedule of values
You will often submit a schedule of values at bid time, or when the bid is awarded. Your schedule then gets meshed with everyone else’s to produce the SOV for the project. The idea behind this exercise is to predict the cash flow for the project by matching the amount of finished work to the dollars paid out at various intervals.
Like everyone else, you need positive cash flow. To get it, you want to get paid for completed work as quickly as possible. Getting your schedule of values to accurately reflect the work you expect to have completed at various times during the project is most crucial for subcontractors who perform in later stages of a project.
You might have costs very early in the project for items like design-assist and mobilization, but there’s a long lag time before you begin work. Then, there’s another lag before you get paid. If you don’t put those costs at the top of your SOV, you’ll carry them a long time. Other items to load into the front of your SOV are items you have to fabricate ahead of time, and the costs of shop drawings needed for submittals. Also, look at your general conditions for sleepers you won’t realize you’re spending money on until it’s too late.
In life, change is the only constant, and that’s even more true on construction projects. But, how can you reduce the effects of changes? You have to start at their origins. From a purely preventive perspective, it’s wise to review the contract documents for vagaries and incomplete information. In that way you can anticipate places where changes are likely. Once you know those potential changes, you can take steps to mitigate their effects, or even eliminate them.
Here’s an example. If you are a painting contractor and you notice the plans specify a level 4 drywall finish in an area calling for semi-gloss paint, you should confirm that finish with the design team, since those areas would normally have a level 5 specified.
For all those times when you can’t anticipate the changes, refine your change process system so changes get dealt with quickly and efficiently. Scrutinize your levels of notice and approvals, and keep them as lean as you can without compromising transparency and need-to-know. Use digital technologies to speed up processing. Incorporate photos and video to help explain change details. Anything you do that speeds up change processing, will speed up getting reimbursed for the changes. That helps your cash flow.
Finally, tend to your business relationships with care. Cash flows in the direction of least resistance, so tend to the details, and keep a friendly smile.