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Jeff Spencer’s Top Invoicing Strategies for Construction Contractors

Jun 25, 2024 | Blog

Today, in a conversation between Chris Work and Jeff Spencer, we’re diving into different invoicing strategies that construction contractors can use. Jeff has worked with a lot of contractors over the years, and he has some valuable insights to share.

Chris: Jeff, can you start us off?

Upfront Billing

Jeff: Sure. One common strategy is to bill a good chunk upfront, usually as a percentage of the total project cost. This helps ensure there is money flowing in to cover expenses like labor and materials from the start. It’s what I call “aggressive billing.” By overbilling a bit throughout the project, you keep a steady cash flow, but you have to be careful not to run out of funds before the project is complete.

Chris: So, you’re saying it’s strategic to overbill a little?

Jeff: Yes, but it can be a double-edged sword. If you don’t manage it well, you could end up paying out of pocket towards the end of the project, using money you’ve already billed for. That’s why I’ve learned to be more conservative with billing.

Conservative Billing

Jeff: Nowadays, I bill only for our actual costs—labor, equipment, materials, fuel—and add a small profit margin, maybe 4-5%. This way, we have some money in the bank but avoid large cash flow issues. At the end of the job, when we’re 90-95% complete, we bill for 100% of the job, resulting in a substantial final payment. This strategy prevents the need to borrow money or juggle finances at the last minute.

Retainage and State Regulations

Jeff: In Tennessee, there used to be a state law allowing clients to hold 10% of each draw for retainage. This was a problem because that money is essentially the contractor’s profit each month. They’ve since reduced it to 5%, which helps maintain some operating capital each month.

Payment Schedules

Jeff: Another important factor is the client’s payment schedule. You need to strategize your billing based on how long it takes to get paid. If it takes 30-45 days to receive payment, you have to ensure you have enough cash flow to cover expenses during that period. This is crucial for smaller contractors or those with fewer ongoing projects.

Chris: Does the client’s payment schedule influence the bidding process?

Jeff: Yes and no. It depends on the size of your company. If you work with a client regularly, you might know their payment terms, but it can vary from project to project. Always check the contract to understand when you’ll get paid, as this can significantly impact your cash flow.

Strategic Invoicing

Jeff: Strategic invoicing is vital. Knowing your monthly costs helps you plan your billing to ensure you have enough funds to cover your expenses. Tools like ProfitDig can help smaller contractors track their costs and better understand their financial needs.

Any other invoicing strategies, Jeff?

Jeff: Those are the main strategies we use in construction. There might be other methods depending on the industry, but the key is to manage your billing and cash flow effectively.

Chris: Sounds like a solid plan.

By following these invoicing strategies, construction contractors can better manage their cash flow, avoid financial pitfalls, and ensure the successful completion of their projects. Whether you’re a small contractor or managing multiple jobs, strategic billing is essential for maintaining a healthy business.