Payment Schedules in Commercial Cabinetry Work
When it comes to deposits, progress payments, and final payment, commercial work is a whole nother world. Here's the voice of experience on bidding and contracting those jobs. August 7, 2006
Question
I am bidding a commercial job that I have to deliver later today. I usually do residential work, and typically request 40% to 50% up front depending on the size of the job.
Is this reasonable for commercial jobs or should I expect Net-30 at the end of the job? This is important since I will need to get a short term loan to cover all of the up front expenses should I get this job. If I can get the 40%, I'm covered on materials and initial labor requirements (I'm going to bring in contract cabinet makers for the short term to help with assembly and installation).
Forum Responses
(Business Forum)
From contributor A:
Always do your quotes with a 50% deposit requirement. We usually do 50% down, 40% pro forma and 10% on completion. You can always negotiate if you get the job, but why start at less than what you need to do the work
From the original questioner:
I decided to leave the terms open for negotiation, and go ahead and get it in. I feel very confident that I have the business from my conversation this morning. I figured I can negotiate the terms after they have accepted my pricing and we can iron that out later.
This is considerably looser than I would normally work, but this company has an exceptional D&B and has a great rep with my friend who passed the job on to me. He didn't think terms would be an issue with them. Guess I'll find out.
From contributor B:
It sounds like you have it all set, so good luck. In general I would say to stay within what you are willing to lose should something go wrong. If you can cover the loan yourself should the job go belly up for whatever reason, then great - otherwise, cover your own assets and get the materials up front like you normally do. I'd be hard pressed to color outside my normal lines.
From contributor C:
I would still ask for a deposit. While they might have a nice reputation and all, you have not done any work with them to generate a payment history.
From contributor E:
It may be too late now but it is quite rare to get deposits in the commercial world, unless you are working with an unusual contractor. If I needed a deposit - for instance, if there was a very large up front cash requirement for materials, I would absolutely spell it out in my proposal because most commercial contractors will not negotiate this after the fact.
If you get the job, you may get a contract with a clause that says you will get paid when the contractor gets paid, or worse, get paid if the contractor gets paid. You may also encounter retainage, where 5 to 10 per cent of your money is held indefinitely. These are only the beginning of the differences you will find between commercial and residential subcontracting.
My business is almost 100% commercial and I have developed some strategies that alleviate payment problems, but a substantial line of credit is essential for success in the commercial world. Depending on the size of the job and the structure of the general contractor, it is most common to develop a schedule of values to bill against and expect to get paid about 30 days from your invoice date. (Most commercial contractors will only accept bills on a certain date, usually the 15th or the 20th, and not a day later than the stated date.) My price includes a line item for financing the project and with some of my customers I rebate 1 or 2 per cent for 20 day terms- exorbitant as an interest rate, but very useful for improving cash flow. This is a topic dear to the heart of most of my commercial colleagues and could be expanded on indefinitely.
From contributor D:
Jobs that are competitively bid or have multiple GC's or mill-workers generally won't happen up front but you can contact the controller and make a deal or offer a line item alternate, i.e. you may deduct x% for payment of a 50% deposit. You will never get it if you don't ask or negotiate it in. Many times when customers are looking to save money I tell them I offer my corporate accounts 1% for 10 and will give them 2% for a 50% deposit and 35% on delivery. Once you start working on their money then your credit needs decrease, as long as you are profitable.
Discounts can generate cash flow from any corporate customer. We get deposits on direct to owner commercial work all the time. I get deposits from about 10% of the GC jobs where its one off work and the GC gets it from the owner. If you get a deposit you should be able to discount your material bills to reduce the impact of the discount.
From contributor E:
There are a lot of ways to work the problem, but you have to raise the issue in advance if you want to be certain of getting somewhere, or be prepared to walk away. There are some GCs, usually the larger ones who do public work, who are absolutely rigid about financing and contract terms, and even if they use your number with your terms expressed in your proposal they may not write you a contract with your payment terms. If you don't want to walk away from the work, you have to have the extra money for financing built into your price.
From the original questioner:
I have to file some elevations for them today for final approval, but all is looking good. We approached the terms issue yesterday, and I explained that my company is new, only 1-1/2 years, and the way I usually work. The site engineer said he didn't think it would be a problem to work with a deposit of some amount. We still have a ways to go. I used to be assistant GM for a 22 million a year lumber, pallet and specialty wood products company. I have worked with contracts for years, and know the in's and out's. But our company had a 100 million+ credit line, so terms - while critical - were easier to negotiate on million dollar accounts. This one is a long way from that, and of course I have not generated a credit line at my bank so far. To date I have been able to pay for everything I have required, and have operated on a cash basis with down payments. While this job is not huge as far as commercial jobs go, it is nonetheless a stretch for a small business that has finally made it to a crawl. I have a habit of reading everything before I sign a contract, and am very detailed in my work, making sure everything is signed off on at final acceptance. CYA as the old adage goes, still, I second guess myself daily even though I know what it takes to succeed. And speaking of that, I need to get back out to the shop. Will follow up in a few days and let you know how it goes.
From contributor D:
There is a large nationwide broker doing lab and commercial work, and some other trades, next time you lose a project to them ask to see the complete bid. I know they are getting paid per their terms a lot of the time. In CA if the GC accepts your bid they accept your terms - unless the issue a letter of terms and conditions with the invite. The big casework guys that manufacture only are getting net 30 from their dealers.
It’s all in the language and how hard you want to play versus how much you need the work. We stay away from public work - we don't have the right mind set for it - but I work with a few GCs who bill 100M a month and can get paid quick from some of them. Once it’s approved, the check is run, it’s in for signing, scheduled to mail, is mailed (they run it thru the postage meter), and then it arrives (some 2-4 weeks later). They are 60-90 days when fast.
From contributor E:
When people ask me what I do I often reply that I'm in the construction financing business. We have evolved to take this aspect of the business into account and still be profitable, but it involves being more expensive than most of the competition. Our customers know that, and while we get a low percentage of the really hard bid jobs that we look at, they also know that when they use us they will get what they need with no hassles, so we get a high percentage of the negotiated work we bid, and even get some of the hard bid work when we are not low. Being able to do really difficult projects on a fast track schedule and handle the financing is one of our greatest competitive advantages and allows us to continue getting work even when we are not low bidder. But the business has to be structured for this market or it doesn't work.
From the original questioner:
I got the contract, and it looks like God is smiling a bit more. The company the GC is building for is a non-profit (sounds like my company less the tax #) The NP is going to pay for the materials on their account so they can use their tax #, this also takes all of the material details out of my check book and puts it in theirs. Everyone's D&B checks out, so far so good. The GC already wants me to work on some other jobs, but I would rather get one out of the way first, which they have agreed to.
