Following are some steps that you can take to minimize the risk of client non-payment:
Know your clients and their financial situation prior to signing a contract to do business with them. Almost every time I speak with a custom builder about a “client from hell” or a client dragging out or not making payments, there were signs during the sales process that should have tipped him off to what the clients were really like. Take time up front to evaluate if a prospect is a good fit for your company. I keep a plaque that my wife gave me on my desk that simply says, “No is not a dirty word.” If the client is not a good fit for you, just say no.
Implement procedures to keep the client up to speed on budget changes. In fixed-price contracts, make sure you have strong procedures for processing customer change orders that include these rules:
- Don’t start any change order work until you have written approval from the homeowner.
- Get paid for contract changes up front.
- Stay on top of allowance overages with the client.
For cost-plus contracts, it is important to track costs against your original estimate and keep the customer informed of changes to the budget. I suggest implementing a system that has the customer sign off on all changes. (One custom builder I know has customers sign an authorization letter every time they make a change from the original scope.)
Develop a draw schedule in which you are always ahead of the construction schedule. However, from an accounting point of view, make sure you are using percentage-of-completion accounting so you can recognize your overbillings.
In cost-plus you are billing your clients after you are billed by your subcontractors and suppliers and after paying your payroll. Therefore, ask for a deposit up front and maintain the deposit for the life of the job.
Communicate with clients on a regular basis to keep them up to speed on budget and schedule changes.
A key employee becomes ill
A custom builder client called to say that his partner, who was responsible for operations, had had a heart attack and would be unable to work for several months. He was a critical member of the team who kept a lot of information in his head. The absence of this employee put the company into crisis mode.
A company’s employees, whether the owner, key manager, or field laborer, are critical to the smooth operation of a custom building operation. When an employee is out of work for an extended period of time the rest of the team has to pick up the slack. How can you minimize the risk from a prolonged illness of one of your employees?
- Systems, systems, and more systems, and make sure that they are documented. With good, documented systems it will be easier for new people to step in and do the work usually performed by another team member.
- Cross train your team members to make it easier for others to fill in.
- Train your employees to be organized and better time managers. In visiting custom builders I always find at least one person with a desk that looks like it was hit by a tornado. Even if this person knows where everything on their desk is, it will be impossible for you to find something on it if he is out sick.
- Train your employees to take care of themselves. You want your team to work hard but not so hard that it causes them to get sick.
- Train your team to document their work and not keep information in their heads.
- Strong systems should include reporting tools that enable information to be shared amongst members of the team.
While we all really hope for the best, the wisest of us will manage risks by planning for the worst. Putting these suggestions in place in your business will help you come through unexpected crises with a minimum of problems, and they’ll improve your performance during the best of times.
Steve Maltzman, CPA, is president of SMA Consulting in Colton, Calif. Visit him at www.smaconsulting.net.
