Let’s talk about handling your billing procedures and taking money for your projects – construction billing management. A lot of construction companies, especially newer ones, struggle maintaining enough capital to run on – money to operate on. Money often gets tight and you may want to overbill a project, but if you do that you’re setting yourself up for destruction. If you start overbilling at the start of a project and then use that money to run the job, when the project is complete, you don’t have any money coming in. But you still have costs going out. You’re on the opposite side of the spectrum.
You’ve got to stay focused. You want to bill enough every month to cover your costs for that job, your labor, and your materials. Then bill a very small portion of your profit. If you’ve got 15 or 20% profit in this project, bill 1 or 2 % profit every month. Then all your expenses are covered and you’re able to bank a little bit of operating capital as you go along. Then when you get down to the last month of your project, all your labor, materials and equipment time is covered. So you’ve got all your profit sitting out there waiting on you.
When you do your final billing, you’ve got very minimal costs coming out of that billing. Then you’ve got money to put in the bank that you could fund your next project with. If you manage your next project like that then that capital just continues to grow, and grow, and grow, because you have no need to use it other than to move it to the next project. It’s going to continue to grow like that until you have a project go South that takes a chunk out of it, but that is inevitable. It is much better to have excess capital when this happens than to already be stretched thin. To me, this is a good way to get a start on having a successful company and building a large amount of capital.
It does seem like, in theory, it shouldn’t make any difference because you’re getting the same amount of money. The problem is that it is human nature that if you get extra money you are going to find something to spend it on.
When you get that large sum in, if you’re already established you’re going to have more than one project going. Well, you’re going to take this job if you’ve overbilled and you’re going to fund this job over here that may be slacking or you’re going to buy this that you ordinarily wouldn’t buy because you didn’t have the money. But now that you took in this large sum on your first draw you’ve dwindled away your profits. You’re eating away your profits. You never really see your profit because you’ve already spent it. I supposed one advantage is that in the long run it will help on your taxes. But to me, I would rather have to pay some taxes and know that I’m making money than get money back on my taxes and take a loss.
It’s really just common sense cashflow management.
You want to cover your costs just enough to get by. Your 1 or 2% profit is enough to cover your payroll for the next month and your fuel for the next month. You want to get to a point to where you put money in your projects for equipment… for trucking… for labor. You want to get to the point where you can separate that out and stick that money aside. That way when you’re on your next project, or your next month, you’ve got that money sitting aside to cover all those costs because it’s already built up. Then if you can do it for job after job after job, after you’ve had four or five jobs at budget or under budget, then you’ve got a large sum of money sitting there to operate on. You’re building capital pretty quick.
If you’re in the construction business, you can’t have too much capital. This type of conservative cashflow management strategy can help you have a very successful and lucrative business, in addition to saving you a lot of stress.