How do you set your progress claims for your projects?
Find out the WINNING formula for better cash flow.
Watch the video now, or read the transcript below.
So Duayne, we’re going to talk about contracts and something that’s the nuts and bolts of contracts, which actually is your draws or your project claims in your contracts.
Default Contracts and Progress Claims
This is something when we work with builders, there’s this big “AHA!”, that’s why my cash flow has sucked. That’s why I’ve not been able to get this to work. A lot of builders don’t even think to look at how their progress claims are structured so that it actually sets their business up for better cash flow, better financial management, better workflow overall.
What do you do with your progress claims, and how do you suggest builders think about this in their contracts so that they can structure them better for their businesses?
Well, definitely don’t just go with the default. Like if you’re using Master Builders, HIA contracts, or a lot of standard contracts, they will have a standard guide of your project draws or your progress draws. And nine times out of ten these are completely based on the volume type builders.
I think they’re generally about six draws. There’ll be a deposit, slab draw, frame draw, lock up. So very, very basic draws, and they basically only apply to a very standard volume build on a flat block of land.
That takes 16 weeks to build.
Yeah, very, very standard. So you can do that, because it is only a 16-week build, and you’ll pretty much get a payment every two to three weeks.
How to Get Paid Monthly as a Builder
Go away from setting the default progress claims. Most contracts these days give you three options. So you’ll have the standard default option, you’ll have a progress draw layout that you can make suggestions on, or the one that we really prefer, is we go with either 21-day or monthly payments.
It’s been a massive turn-around in our business and our cash flow because we can set the draws to suit the cash flow of our business.
And, I think the important part to remember here is you’re the builder. It’s your business. People around you can’t tell you what you need to be claiming and drawing. We’re going to get the people watching this video going, “Oh, but the bank tells me this.” “Oh, the client’s telling me this.” And that’s fine, they’re going to tell you that. But then that’s where you need to educate them and explain to them what you need to keep your business profitable and the cash flow coming so that you can have a successful build.
At the end of the day with either option, if you’re setting out your own draws, for us personally, we do a full review of our proposal. And by this time we’ve generally done a little bit of a brief outline of a job schedule, and we set out our progress draws so that we’re getting paid every three at the maximum four weeks.
If you’re doing big jobs, one, two, three million dollars, big renovations where the workflow can be quite spread out across the site, it is really important that you schedule your draws to make sure you’re getting regular income.
The other thing with this, getting 21-day or monthly draws, wherever we can now we use that progress draw type Method C. Because for us it’s better for everyone. We only claim for what we’ve either done on-site, we’ve paid deposits on, materials that have been delivered, and so the client is actually paying us for what they physically have plus our margins. And it’s better for everyone.
I get paid for what I do, the client’s only paying for what they’re getting.
I’ve found over the years when you’re trying to schedule your progress draws, especially if you’re using the standard ones from the bank, they’re just so unknown. One might be really bulked up and one might be really low, and so your cash flow is really affected because it just doesn’t suit the type of project, that type of site, and all those types of things.
I think this is relevant if you’re a builder who’s doing larger projects that might take 12 months or more to complete, and be big chunks of money, because you’re then going to be out of pocket for long periods of time, waiting for that next stage to be finished.
Equally, I think it’s as relevant for the builder who might only be doing one or two projects per year, where your cash flow is actually the difference between you keeping a roof over your head and not, and you don’t have the ability to spread risk across other projects, or pull teams from one project to another when you’re needing to stagger because of delays and things like that.
Being able to break down those types of projects into smaller incremental charges, I think it manages the risk of the client as well, because they then know that they’re not paying for big, big chunks of work and seeing this great big amount of money leave their account. They’re seeing that they’re paying more incrementally.
Educating the Banks and Your Clients
You do, however, though, need to deal with a few things, don’t you in terms of educating the client and the bank. Because there’s a difference between obviously if you’re working with a self-funded client, who it’s just you negotiating with them, explaining why this is valuable and the way to structure their contract, that’s one thing. But if you also have to deal with a bank, and I know the homeowners that I deal with, a lot of them will hit their bank, and their bank says, “No, we just want the five or six progress draws, because we have to send in a valuer for every progress draw.
And someone has to pay for that.
Yeah. So how do you navigate that sort of challenge in terms of builders being able to do this?
So it all comes back to having a process. You’ve got to be asking questions. It’s really important to find out quite early on how the client is funding the job. Because that makes all the difference. Obviously, if they’re self-funded then Method C, 21-day or monthly draws, is not a real issue. A lot of banks will knock back on Method C, because they want something tangible.
They want something that their valuer can very easily relate to the plans. They do want to try and keep the draws to a minimum because a lot of banks these days will do a valuation on almost every draw. So, we’ve found from asking questions and educating ourselves that a lot of banks might only have four or five valuations allowed in their fees for the finance, and if there’s any more outside of that it’s an extra fee to the client.
You can get around this by having those conversations with the clients. Educating them on what’s better for them, what’s better for you, they might be happy to pay a few more valuations. But we’ve definitely found that it’s all education, and again, it comes back to setting that expectation.
We have a draft invoice now that we can send to a bank. So we always ask for contact details, whether it’s for a broker or their bank manager, whoever they’re dealing with for their finance that we can deal with directly. We will always copy the client in, but so that we can talk through it, because so many times we’ve had banks and clients come back and just say, “No, we’re not going that option.” “Not interested, you’ve got to do option A.”
We’re in a position now with our business where we would walk away from that job. Because for me, having the mindset and the power to walk away from a job that is going to affect my cash flow is big because that doesn’t affect my business, it affects me personally.
Being in a position where we can educate the banks and talk through that, and nine times out of ten we end up coming to an agreement somewhere in the middle. So, having a template of how you will put a progress payment in.
A lot of the time it is about helping the valuer see what they’re actually going to value. So when we do a progress draw, whether it is Option B, and it’s ones that we’ve set out, or when we do put in a 21-day draw, we clearly list out. We’ll list out what materials have had deposits paid for, what materials have been sent to site. If it’s a trade-based work, we’ll say internal carpentry fit-out 80% complete, tiling 50% complete. We’ll break it down so that then the valuer can clearly see that we’re not trying to claim everything. We’re being very open and honest, we’re only claiming for what we’ve actually done.
It’s better for everyone, I’m getting paid for what I’ve done, I’m getting cash in my bank, the client is only paying for what’s been done. So there’s no guesswork.
So as a builder, next time you’re looking at setting up your contract, or if you want to actually now have a read-through of your contract, have a look at what options you’ve got for your progress claims. And see what’s going to work for yourself in terms of your business cash flow. It can be really good to go back and audit an old project and see where you might have struggled in your cash flow, if you just did choose option A, see how you could potentially change that.
And then look at what processes you need to put in place to be able to educate your client, and help them navigate the process of financing so that the bank is informed about what the options are as well.
The other thing that is really important and our PAC process has been fantastic for working through this process, is getting an understanding of how your client’s going to finance a job really early on. So, even back when you’re working through the design stage, figuring out are they financing the entire job, only part of it, are they paying out of their own funds? And then starting those conversations.
Don’t just leave it until you’re signing the contract because then everyone’s in a rush, you need the cash flow, the client wants to start the job and you can end up accepting things that aren’t going to be good for your business.
We have talked previously about staying on top of your business cash flow in this article https://www.livelifebuild.com/blog/processes-scheduling-projects/, and long time ELEVATE member Matthew Prokuda talks about his first year making a profit with his building business here: https://www.livelifebuild.com/blog/member-review-matthew-prokuda-radius-builders/