Running a successful construction company involves bidding on and winning a steady stream of projects throughout the year. Success involves meeting customer demands, including delivering quality work, meeting agreed-upon deadlines and budgets, and having an open line of communication with customers throughout the life of the project to keep them abreast of any changes (in scheduling or cost) or potential hiccups. All of these and other factors should be spelled out in the contractual agreement with a client. In addition, how a construction company gets paid for its work is critical to its cash flow and ongoing success.
There are several payment options construction companies can consider, depending on their size, the project’s size, and the relationship with the customer.
Advance Billing: The option gets you paid in advance, even before the construction project begins. Getting advance payment provides you with cash flow to purchase raw materials and pay subcontractors and vendors. On the flip side, if the project exceeds the budget, any extra costs will come out of your pocket unless otherwise specified in your contractual agreement with the customer. Typically, this type of option is used with recurring clients and on smaller projects.
Progress Billing: Used on the majority of construction projects, with this option, you get paid as each milestone outlined in your agreement with the client is met. Payments are released based on the schedule you provided in the contract.
Arrears Billing: With this option, you will invoice the customer at the end of a project. Once all stakeholders have signed off on and approved the final product, payment is made in one lump sum. This option is particularly risky for a contractor, as you end up floating the job’s costs. You pay for materials and labor out of pocket and rely on clients to pay in full and on time. This payment option is best for shorter-term projects and works for construction companies with significant cash flow looking to build trust with new clients.
Fixed-Price Billing or Lump Sum: The client pays a lump sum for the entire construction project. Contractors are entitled to receive incentives for early completion and are penalized for exceeding contract deadlines. This option works well when the scope is clearly defined and there is no price fluctuation in labor or raw materials.
Cost-Plus Billing: The client pays for the cost of the project plus a fee for profit. These costs include labor, materials, and equipment. They can also include the costs for insurance, travel mileage, and communication expenses. This is good for projects with an undefined scope but requires a great deal of documentation to provide to the client.
Time and Materials: Like a cost-plus contract, this option provides flexibility for a project with a less defined scope. It’s based on the cost of materials for a project and a set hourly or daily rate. The contract allows you to specify which materials will be covered and to include change orders. A fixed-pay rate also provides the benefit of receiving full payment for hours worked if the project takes longer than expected. Note: This payment option involves a document-intensive process.