Cash Flow on a Custom Project

Funding for a custom project built on the client’s property is provided by the client. Still, there are potentially significant problems when you are managing your company cash flow for a custom building project like this.

If you are spec building, your next funding draw is between you and your lender. But when the client is an integral part of the funding approval process, there are many pitfalls you need to be ready to deal with on a routine basis.

First, you need to allocate additional time to get paid since the owner’s lender may be ready, willing and able to fund but the owner may present issues or delays related to their concerns about scheduling, quality or changes. My construction contract has provisions that require our clients to fund within five days of receipt of our request. It also stipulates that failure to do so gives us the right to temporarily stop the job. However, it is not a remedy that is easily employed without risking a breach in the mutual bond of trust that you have worked hard to establish with your client since the day of your first sales meeting.

The risks and costs of not stopping the jobs are significant. You jeopardize your ability to pay trade contractors quickly, a tradition you worked hard to establish and maintain in your company. You are using your company’s hard-earned credit with vendors and trades when a funding request from a client is delinquent.

My credit history with my vendors and trades has been excellent, but we have been paying more slowly recently as we have allowed payables on client jobs to age and accumulate longer than we should. When the money you owe to vendors and trades exceeds the deposit retainer and the operating account that you have from your client, you run the risk of losing control over your company’s cash flow management. This is not a good business practice. If your client becomes comfortable paying late and at their leisure and they do not suffer the consequence of a stopped job, you are no longer in control of your cash flow. Your client is now in the driver’s seat with his foot on the brakes of your revenue stream!

Here are a few suggestions for staying in control:

  1. Increase the retainer deposit you obtain and, if necessary, lower the operating account balance you require. Balancing your need for an ample deposit with your sales goal of converting your prospect to a client requires a commitment to a minimum acceptable level of retainer. Ask for 10 percent of the preliminary budget as your retainer and 5 percent for your operating account.

    So if you are bidding on a $500,000 custom home, you will be asking for $50,000 to hold to apply to the last funding request and $25,000 to establish your operating account for your client. I strongly recommend that you set up a separate checking account for each custom project you build. This avoids commingling of funds between clients which can easily become a recipe for financial disaster. The bigger your retainer, the better cushion you will have when you need it the most; at the end of the job when you are most exposed to underfunding and a speedy acceleration of your payables.
  2. Be sure you make funding requests every 14 days, or whenever the work-in-place exceeds a specific mutually agreed-upon dollar amount.
  3. Give your client a written three-day grace period when funding is past due and then, if necessary, notify him in writing that the job is temporarily stopped.

If you initiate these practices at the start of the job your client will be a lot less likely to delay the job. You will be in the driver’s seat of your company cash flow, which is good for you and ultimately good for all of your clients, vendors and trades.