Commercial Work, Payment Terms, and Cash Flow
A commercial millwork shop owner who usually bills weekly considers whether to take on work with monthly billing and possible payment delays. Here's a good discussion about the risks you take when you change the way you do business. November 23, 2012
Question
My business is commercial millwork installation. It was great until the last few years. I did some web posting and surprise, someone called. They appear to be just the kind of client, doing just the kind of jobs I have been craving. After meeting their criteria, I have been offered a sweet install, and they liked my price. A contract is in the works.
I'm terrified. Through hundreds of jobs, over many years, I have always worked for local clients. This one is halfway across state, and a perfect stranger. I have always been able to get paid by billing for the weeks work, plus a week to process. I offer a small discount for this favor, and everyone has worked with me until now. Yes, I am spoiled, and I like it.
Now these guys only play the hard way. Billing day is the same time each month, with 30 days to pay. They are very nice but I have some trust issues. Do any of you sage business heads have some pointers on how to do some vetting of my own? I really appreciate your help.
Forum Responses
(Business and Management Forum)
From contributor H:
The gut is rarely wrong. Work on your terms.
From contributor J:
Give them your terms of payment. If they don't like it then your gut feelings are telling you they’re not what they seem to be. Let them get their financing from a bank.
From contributor R:
I would call around their side of the state and see if some other shops that have done business with them are willing to talk about it. You might also ask them for a reference to someone who has done the same type of work for them. If they hesitate to tell you, they probably have some reason they are reaching out farther to find these kind of people.
From contributor U:
I'd go down to your local lawyer friend and have him/her write a contract. I would also file the proper builder’s board papers for each project you work on, being prepared to lien the project if payment is late. Do this in advance of needing it. If you have to file a lien then foreclose the following week. You'll get your money. Most of us are good at making the product but no so good at getting money from those who don't pay.
From contributor L:
Their terms are the norm. If you move into this kind of business you need to be able to finance at least 60 days worth, past the billing date. Check with others who have worked for them. I know the feeling though. Two years ago we had a big, for us, job out of state it took 60 days to get paid after the final truck load. The problem with references is that you never really know when a GC is going to go belly up.
From contributor B:
No way would I deliver product and wait 60 days for payment. Here's the product, where's my check? Your gut feeling is probably right on otherwise they would be willing to work with you on payment scheduling. Too many regulars in the commercial world allow larger companies to set payment terms. This is how we pay, etc.
From contributor L:
Contributor B - you left out waiting until final acceptance and sign off by the architect and owner plus 45-60 days to get your 10% retainer amount. That part has nothing to do with when your part of the job was finished. I've often wondered what kind of a fool would be in this business. High risk, low reward!
From contributor B:
I don't agree with the high risk low return assessment of commercial work, at least not the high risk portion. It seems to me the majority of posters here are in residential work. I expect they regularly encounter problems - I wouldn't want to do a job for my wife or anyone. Their customers are doing this for the first time, are concerned about getting cheated and some I'm sure are just dishonest. So I think the residential side is always going to be more concerned about getting paid. They need to get money up front and have a predefined payment schedule with a solid contract or their customers will eat them alive.
For commercial work the payment concerns (that being "if" you get paid not "when" you get paid) are minimal. In the six years I've been in business I've had 18mm in sales and 11K in write-offs. I've probably had a difficult time getting paid on another 50K but ended up with the cash in the end.
I pay my installers net 30 regardless of when I get paid. This is probably a bit sooner/better than most of my competitors. I do look with question at installers that knock on my door and say they need to get paid weekly. First of all, it's a hassle. More so, I think it reflects poorly on them as businessmen. I've invested hundreds of thousands in my business. If an installer can't invest 20K in cash reserves to keep his business going it doesn't show a lot of commitment (even paperboys get paid only once a month). If you run your business in such a manner that you absolutely need to get paid quickly your business might not be taken too seriously.
From contributor C:
Get an AIA contract on every job. List this on your estimate or bid. Contracts on AIA documentation is imperative. Submit your shop drawings and bill for them right away and send it to the controller or head of accounting of that GC firm first. Get a water tight trailer and fill it with adjustables, countertops, and all that applies to open ended items that have been approved, get it to the job site, bill for mobilization and product on the job. Do this while mechanical is going in. Change order them on the time to extract the changed casework from the trailer. Don't make the change until a signed change order is in hand. Get out of the install business and become a casework supplier.
From contributor L:
"Get out of the install business and become a casework supplier." We did this a number of years ago. It's one of the better things we've done. It ended a lot of hassles: scheduling the install, dealing with jobsite conditions that were often miserable, sending employees half way across the country only to find we'd been lied to about it being ready, dealing with east coast unions, and pay offs. It’s much better to use installation companies.
From the original questioner:
I really appreciate your thoughtful responses. Negotiations are ongoing, and I am seriously feeling 50/50 on signing the contract. They seem to check out ok but terms are still open. I am actively polling my local clients, hoping there will be enough to get through winter with steady work, but it looks weak. By the way, I only do commercial. I would love to live in the world of steady business and cash reserves, but I have a family with needs, and a kid in college, and am scraping bottom for work that was more than I could handle three years ago. Who of you can honestly say you saw this slump coming, and prepared well for it? Hard work used to get me through, but now the pickings are slim. I'll share the results when this is decided.
From contributor J:
The final crunch left me no choice but to get the terms I need or pass. They passed.
