Landis: 10 Tips to Increase Cash Flow for Design-Build Firms

by Emily Blackburn

The popularity of “10 best” lists made me think about the top ways we’ve increased our design-build company’s cash flow. Each of these best practices has been paid for by our firm, in blood and treasure. 

First, a definition of cash flow: It is the amount of money being transferred into and out of the business. Increasing cash flow means getting paid faster and, because of this, negotiating from a position of strength.

  1. Design contract deposits. If you are a design-build firm, collect 50 percent of your design contract as a deposit upfront for any schematic design. Please check your state laws to see what the maximum percentage is that you can collect upfront and then do that. 
  2. Construction contract deposits. With your construction contract, you should collect at least 10 percent as a deposit. With inflation and supply chain issues of late, locking in orders well in advance is critical to allow you to purchase materials at today’s cost.
  3. Use ‘Share of Value’ for big jobs. An SOV payment system helps you receive payments in steady increments. It helps avoid becoming dependent on traditional building-process milestones, which too often can be questioned, delayed or take place out of sequence. See the sidebar within this column.
  4. Begin each phase with a draw. If you are using a milestone payment schedule in your construction contracts, always be sure that the draw is due at a start of the phase. If you make it upon completion of a phase, any “punch list” item left open can slow down payments. 
  5. Properly sequence draws. Confirm that the draws in your construction contract are correctly sequenced to match your actual construction process. A quick review of your likely workflow for a job enables you to sequence draws better. As workflows continue according to plan, you continue to get paid. 
  6. Deposits for change orders. Collect 50 percent on all change orders upon the client signing the change order. And don’t forget to “ballpark” the cost of the change order for the client before going through the exact detailing of the change order. Also be sure to include the design costs involved. 
  7. Use electronic bank payments or ACH. Use the ACH (automatic clearing house) method for all payments. These electronic bank transactions are less costly than PayPal or credit-card transactions. Avoid the U.S. Postal Service. 
  8. Forecast your receivables. Track receivables 30, 60 and 90 days out. Among other things, this practice will ask your project managers to foresee phase-completion problems in advance. The advanced warning will enable your project manager to get back on track before asking for a milestone payment or—more important—final payment. 
  9. Define your punch list early. Clearly define your punch list in advance of needing to collect the final payment. Define the “substantial completion” terms in your contract to allow collection of final payment once the client is able to “use the space for its intended purpose.”
  10. Refer small jobs to others. If the job is too small for your business, you can refer subcontractors to do the job directly. If you do end up managing those subcontractors, though, consider getting a referral or management fee for the work you will do to make sure that the job is done to the level of expertise that your firm is known for. 

Any one of these suggestions will enable you to have more control over your business and to provide process clarity to your employees.  QR

Christopher K. Landis, AIA, owns Landis Construction in Washington, D.C. He brings 30 years of remodeling design, construction and management experience to this series of columns for the magazine. You can reach him
at chris@landisconstruction.com.

Using ‘Share of Value’ Method

Many remodeling contractors, particularly those who are engaged in larger projects, are turning to a Share of Value (SOV) methodology for scheduling client payments. It offers several benefits for both clients and contractors. The first benefit is better cash flow. 

There are many templates available to contractors online that help guide remodelers through the process of SOV methodologies. In addition, many project management software solutions commonly used by remodelers offer options to generate SOV documents. 

At Landis Construction, a project in the $250,000 range that would be built over the course of 6 to 8 months might call for eight pre-planned draws. Using all the figures associated with a given project, the SOV document lays out all the products and labor in great detail. As time goes by, the project superintendent is tasked with updating each product category and the percentage completed during a given time frame. Those percentages equate to budgeted dollars and are tallied up at the bottom. 

Many remodelers who use the traditional milestone method of asking for payments after each phase of a project often find themselves in arguments with clients about whether each phase is completed. This is largely avoided using an SOV method.

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