So many builders and remodelers today are missing the boat on effective billing and collection methods. This is one area where a typical small design/build or contracting business can effect a few small changes with potentially big results.
It's no secret that many small businesses fail. A common reason in residential construction work is cash flow - or lack of it. Implementing a Schedule of Values as a contractual and management tool can help.
What is a Schedule of Values? Think of the Schedule of Values as a simple defined list of trade-specific milestones. Easy. (Don't think 'CSI Divisions'!) With each milestone, there is also an assigned dollar valuation. A little more difficult, maybe, but remember that YOU can assign the valuations and decide the milestones. Everything should be based on an accurate and detailed estimate, but you can front-load the schedule as necessary to cover deposit, mobilization, and long-lead items for which you may have to place deposits. This is a tool that puts you in control of the construction process. It can help manage and forecast cash flow, track progress, set goals for the field crew, and reduce client interpretation on accounts receivable. It's a project management no-brainer. I have a sample Excel spreadsheet draft that you can download - but please know that there is no ONE way to do this. The best way is YOUR way - one that's right for you, your business, and your client.
Download Schedule_of_Values.xls
In the attached example, I recommend simply manipulating the percentages for each suggested milestone to match your specific project. Edit the milestones and schedule as you see fit - I'd love to hear your comments.
Write a Schedule of Values. Include in each contract a Schedule of Values which states clearly the value of portions of the work. By doing so, and in conjunction with a good Construction Agreement, your financial and legal interests are better protected. When a Schedule of Values is made part of an agreement, the value for installed work can be clearly stated and is thus agreed, in advance, for the duration of the project. This protects the interests of all parties to the agreement. If a party terminates or defaults, the value for installed work - having been agreed upon in advance - is much easier to identify therefore reducing liability and the need for costly evaluation in any potential negotiation, mediation, arbitration, or litigation. Further, it reinforces your rights to collect on unpaid balances and can serve as supporting documentation for mechanic's liens or legal action. It also protects the homeowner by making it easy to identify amounts that may need to be credited for uninstalled or uncompleted work.
Bill against a Schedule of Values. A classic mistake that many small builders make is laying out vague terms in the Payment Schedule. Some builders and remodelers choose to use ambiguous wording or intermingle separate trades when defining the Payment Schedule. Phrases such as "Due when framing is substantially complete" or "Due at completion of foundation work and start of rough framing" can box you into a corner and dangerously shift interpretation of the Payment Schedule squarely into the lap of the homeowner. Your definition of "substantially complete" may not agree with the homeowner's, and when trades are intermingled billing can get messy if a trade is delayed or, in the latter example, if the framing package hasn't been delivered, one might not be able to collect a payment for competed foundation work.
A good Schedule of Values allows for billing out-of-sequence work. This often happens in remodeling work because of phasing needs, homeowner requirements, or a scheduling problem. We've all been there. 'Can you hold off framing the new addition until the bathroom is completed?".
A good Schedule of Values can also allow one to bill for partially completed work if necessary.
Bank jobs. On financed jobs, many banks will approve the attached Schedule of Values - just check with the lender in advance before ratifying a Construction Agreement.
Why not do this? A common response is "Well, we tried that and it was difficult to remember what had been billed and what hadn't". Come on, you can't cross off which items have been billed and paid on a list? Or how about "By stating values for installed work, we have to share cost breakdowns and then it makes it easy for the client to figure out our mark-up." Do you feel you have to hide something in order to make a fair profit? Most clients in larger remodeling projects own business themselves or are employed in executive and/or managerial positions. Some even appreciate a frank, brief discussion of gross and net margins. Try it sometime if you haven't already. My feeling is that there isn't anything exposed on a Schedule of Values that is damaging - remember - this is about protecting your interests and ensuring steady cash flow.
As a good friend and former professor, George Martin, tells contractors and students "When you have a cash flow problem, you only have ONE problem." Set in place the tools that will help ensure your success - a Schedule of Values is one you need.
Bill regularly. Agree in advance to either bill for work as items on the Schedule of Values are completed, or at a regular interval. I'm a fan of both. For larger companies, it may make sense to bill monthly. For smaller companies, being able to bill for the HVAC rough-in as it is completed can ensure that cash is available to pay a hungry subcontractor soon after he has completed his work. It's not always a matter of the size of your company - it may have to do with the client. We're all busy, but to keep the machine running, we need to get paid. Ever have a client who is away on vacation every time you need to deliver an invoice and get paid? By making it clear that a check needs to get written for completed work on the first day of every month, it makes it easier to deliver the invoice and pick up a check. Everybody is expecting it. By working out a regular interval that is convenient for the homeowner, you're being sensitive to their schedules and finances, too.
Goal setting. Consider, too, that when you consistently bill against a good Schedule of Values, a default paper trail is created of job progress and percentage of completion. For example, job progress can easily be tracked monthly if the job is billed monthly. And when a project advancing at 15% completion/month suddenly only progresses 5% in a given month, a red flag is generated that may help give you some time to react to a slipping schedule or other important issue. If you use job-based employee bonus incentives, the Schedule of Values can be used to set clear, achievable goals for your crew and subcontractors.
When posted on the job site it can easily evolve into a simple Construction Schedule - you may be really holding your feet to the fire by assigning dates or weeks, but most of us work best when goals and milestones are clearly set, clearly visible, and clearly achievable. This topic isn't about scheduling, but implementing a Construction Schedule is worth your consideration, too, because everybody wants to know what the schedule is, anyway.
Consider having your project managers submit a copy of the Schedule of Values to your accounting department at the end of each month. It's easy to simply cross off newly completed tasks, and circle items which will be completed during the next billing cycle.
Established systems/procedures. Remember, too, that the schedule can be used to ensure that you or your project managers follow through with important procedures that you may have developed. For instance, you may require that an electrical or close-in inspection occurs with a client sign-off; if so, make it a line item on your Schedule of Values and get a check for conducting the requisite meeting. If there is a form associated with the event, make delivering the form a condition precedent to receipt of payment. Your client will appreciate it and your employees will follow procedure.
Percentage of Completion. When values are carefully assigned to the trade milestones, it's easy to express each milestone as a percentage of the job - at least from a financial perspective. While this may not be entirely accurate from a time perspective, it is nonetheless an extremely helpful analytical tool.
Evaluation. Because a written record is inevitably produced documenting percentage of completion, a paper trail of progress is generated for current and future job evaluation and comparison.
Cash flow projection. I think you'd be amazed at how many residential construction companies cannot accurately forecast cash flow 30, 60, or 90 days in advance. With the benefit of a Schedule of Values, it's easy to forecast which tasks will be completed when, and therefore avoid dangerously running blind into unknown future recievables and accounts payable obligations.
A well written Schedule of Values is a great and simple tool. It can increase profitability and productivity while reducing liability. All good stuff to have in your tool belt.
