Developing a draw schedule is an important part of any remodeling project. Not only does it ensure that the project is being paid for, but it allows a remodeler to keep the business going. This month, Jesse Morado, CR, CAPS, owner and CEO of Renovation Coach, Inc., and Darius Baker, CEO of D&J Kitchens & Baths, Inc., lend their expertise on scheduling draws.
Scheduling draws basically means a payment schedule. It's used in this business to regulate cash flow as it relates to a remodeler's weekly or biweekly needs for payroll. That includes meeting monthly needs for overhead expenses and meeting ongoing needs for cash flow for material purchases, subcontractor payments, supplies and things of that nature.
Get a Handle
"I think if you get a good handle on your payment schedule, it helps you understand the other needs of your business as well," explains Baker. "If you establish a consistent payment schedule, it helps you meet those other needs, in a timely fashion so you're not always chasing after money for something."
It's also important to note that the type of business that a remodeler runs probably has something to do with how they should set up their draw schedules. In Baker's case, all his company does is kitchen and bath remodeling, so they know the sequence of events in a typical kitchen remodel. They have a really good idea of at what points in which projects that they will need a little more cash flow as opposed to a little less cash flow.
"Scheduling payments helps you get to the point where you can plan all aspects of your project scheduling," says Baker. "If you have a payment due at the passing of rough inspection, then you know when you're looking at your overhead you've got X amount of dollars coming when you pass inspection and you can schedule the work accordingly."
Different Types of Draws
Different types of projects will have different types of scheduled draws. For example, a simple bath remove and replace vs. a project where you're doing a master suite addition with a bathroom in it. A remodeler is obviously going to need more cash flow at different points in time in the addition project than a remodeler would for the simple bathroom project. By developing a consistent method of payments, it helps a remodeler figure a payment schedule out regardless of the size of the project.
"There are a couple of thought processes," explains Morado. "Depending on the size of the project, you're going to want to establish a draw system or draw schedule that will provide cash flow through your company while you're involved on that particular project. That's the impetus to make sure that you're drawing for work that's being performed and through those draws that you actually making enough money to pay off those subs and your material suppliers and at the same time pulling in a little bit of that profit."
Baker has been using the same basic payment schedule for 20 years. Because of the set sequence of events in a kitchen remodel project, they typically have from eight to 10 payments. The first one is the down payment, which they get when a customer commits to them. The next payment is when the company special orders items like cabinets, windows or any products that require a deposit when the order is placed with the supplier. Then they have a payment due when the job is started; a payment due when they pass first inspection; a payment due when the sheetrock is installed; a payment due when the special order items are delivered; a payment when the cabinets are installed; one when the countertops are installed; one when the floor is finished; and then the final payment.
"We actually break our final payment into two parts," says Baker. "The majority of that money is due when we get the final inspection from the building department and everything is signed off. That's when most people can agree on substantial completion. Then we have our final punch list items that we go through and complete before we receive the remainder. So if we had $5,000 still due, we make $4,000 due with the OK from the final inspection and the $1,000 due after that final punch list."
"If you're not careful and don't structure your draw schedule properly, what you can do is end up in a negative cash flow situation," adds Morado. "The whole goal is that you're invoicing to ensure the success of your business and that you don't end up being upside down."