It has been a roller coaster for two years in the construction industry. We’ve been hearing about labour and material shortages and how its driven prices up and blown-out time frames for completion. In Tier 1 and 2 construction markets especially, some businesses have been caught out with fixed-price contracts as prices rose and profit margins shrank.

In many cases profits disappeared completely, with businesses absorbing losses on jobs until they ran out of cash to pay subbies or staff and the business must fold, destroying livelihoods and disrupting lives.

It is one of the iron laws of business: ‘cash is king’. When the money runs out for you to be able to pay your bills as and when they fall due it’s all over!

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It doesn’t matter if your balance sheet is in the black on paper, what your work in progress is, what your forward orders are, or the amount of money your debtors owe you. If you’ve got no money to pay the next payroll run, or your supplier accounts, no money to avoid going into stop credit and be cut off from the supply of materials that you need to perform your core business functions then the merry go round has stopped and there are no more tokens to make it run.

This current environment of labour shortages, but a lot of construction work in the pipeline, is a perfect time for your business to have a look at your quoting, invoicing, and debt collection practices. These can improve your cashflow and increase your margins.

It’s a sellers market. As the provider of a skilled, in-demand service you have more bargaining power than you have had before.  It’s a great opportunity to change practices and reset relationships to a more sustainable, lower risk level.

Quoting

How do you structure your quotes? Do you use a template? If so, now is the time to look at the prices and the mark-ups on your raw materials and your labour charge-out rates.

If you haven’t done so in a while do a calculation of your charge-out rates, MEA provides industry surveys to help you understand market trends that are resources available in the form of spreadsheets and calculators.

Check costs with your suppliers and ensure pricing for your material inputs your cost of goods sold (COGS) is accurate, then look at your mark-ups on your products to make sure that the mark-up reflects the risk associated with supplying the products. Different classes of products, like cables, may have a different markup to others, such as light fittings or circuit breakers.

Get a lawyer to check your terms and conditions to ensure you have them attached or a link to them on your quotes.  Make sure your quotes have a defined validity period on them so it’s clear when a customer contacts you nine months later there is no surprise to them when you have to recheck the pricing.

If it’s a larger job and you’re signing a contract as a subbie, read it carefully to ensure that there are no unfair terms (you should seek advice on this) and it includes flexibility for pricing increases such as rise and fall clauses to ensure you don’t wear unexpected price increases.

Booking the Job

Once you’ve won the job get a deposit to cover any materials that are needed to be purchased, you can do this as a set percentage (for example 35 per cent), or you can bill the specific materials ordered.

If possible, get them delivered to the worksite so they are not taking up space in your premises and they then become the responsibility of the customer. Getting a materials deposit means you are not paying for something now and having it sit against your trade credit with a supplier and you may not be able to recover that cost for weeks or months. It helps your cash flow, and it helps ensure that the expense is being billed in as close a period as possible to when it was incurred.

Invoicing the Job

If you’ve done the work in preparing your terms and conditions well and you’ve spelled payment terms out on your quote before it’s been accepted, you can reduce the risk to your business and preserve that all important cash flow.  A payment schedule for an electrical job could look something like this –

• Materials deposit: 35 per cent
• Prewire: 25 per cent
• Practical completion: 35 per cent
• Sign-off: 5 per cent
• Variations POA (should be invoiced separately)

It’s up to you and the needs of your business, but the goal should be to protect your cashflow and to limit the risk to your business. It also gives some certainty to your customer as to when to expect payment to be delivered.

Stormy Weather?

The US Marine Corps has a saying: No battle plan survives first contact with the enemy. When things don’t go exactly to plan what do you do?

Contact your customers and communicate with them. Tell them you are changing some processes to reflect changes in the market and mitigate risk and give them a date when these changes will be coming in.

Good customers will understand and adjust if they decide to go somewhere else then you’ve reduced risk, got rid of your C-class clients and kept you’re As and Bs.

If someone falls behind and doesn’t pay in terms, politely inform them they are outside of terms and stop work until they do. Your wholesaler will put you on stop-credit if you are outside terms, or over your limit so why wouldn’t you value the work you do the same way?

If you have one or two days of tidying up the shed or getting staff to burn some RDO’s or holidays while you drum up some more work, then it’s better than keeping on digging the hole on a job that owes you money already in a hope that they will pay you eventually.  There is less incentive to pay you in the agreed terms if you just keep turning up.

Master Electricians Australia is fighting hard in every jurisdiction to get uniform Security of Payment legislation introduced with monies protected by statutory trusts. We are also lobbying for the outlawing of “unfair contract terms”.

There are many benefits to being a Master Electrician – and many members don’t use a fraction of the services included in their membership. But one service everyone in the industry benefits from is the policy and advocacy work MEA is involved in. If you are a Master Electrician ring today and speak about how you can get even more value from your membership.

If you are not a Master Electrician join today at masterelectricians.com.au/join or ring 1300 889 198.