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Specialty Contractors and Down Payments

There’s no question we have a shortage of specialty contractors. General contractors often talk about the difficulty in finding subs for their job. This note came from a new subcontractor asking about one of the challenges of starting a construction-related business:

I just finished listening to your audio book, Markup & Profit Revisited. I found it to be very enlightening and plan to apply what I’ve learned to my new electrical contracting business.

Concerning down payments and payment schedules: should specialty contractors also require down payments even when working through a General Contractor? Are most GC’s willing to oblige? What about when working with Commercial & Industrial clients?

For a small shop like mine, with little financial backing, being able to collect down payments and use payment schedules would allow me to be able to take on bigger jobs without having to stress about how I was going to finance the project. As you said, we’re contractors, not bankers.

Thanks again for writing a great book. I just downloaded the audio version of Profitable Sales and plan to start listening to it this evening.

Congratulations to him on starting a new business. There are two things in life everyone needs: electricity and a toilet. Electricians and plumbers will always be in demand.

Yes, you should require down payments even when working with a general contractor. If the general doesn’t want to make a down payment on your work, find another general to work for. You deserve a fair business relationship. If they don’t want to give you a down payment because they didn’t collect one from the owner, I wouldn’t work for them because, in all probability, they’re on their way out of business.

I know some general contractors don’t think they should give subcontractors a down payment, but I disagree with them. If you’re a GC, you should get a down payment on every job, and you should give a down payment to your key subs. Specialty contractors aren’t in business to finance your work or the owner’s job.

Making a down payment shows faith in your subcontractors, and you’ll find them more responsive to your job. Refusing to give a down payment to subcontractors will consign you to the flaky subs. While we’re at it: Subs should also be paid every week or every other week at most. Don’t make them wait weeks or months for payment.

The writer also asked about commercial and industrial clients. When you’re new in business, I wouldn’t even look at anything beyond a light commercial job. Large commercial jobs have a bad habit of eating small specialty contractors. If you get into a job for $60k or $100K or more and they won’t pay you or withhold payment for months, you’ll go under. It’s not worth the risk.

You might be able to negotiate a down payment on a commercial job, but again if you can’t, don’t get involved. You aren’t in business to finance their jobs. Hold out for a down payment, or move on to another general contractor. Subcontractors who are capable and dependable are hard to find.

In the commercial world, I don’t like the game that the “big guys” try to play, getting their jobs built at the expense of their subs and suppliers. If you can’t be paid every week or every two weeks, don’t get involved. I’ve heard of subs waiting two to three months for payment after submitting invoices for their work. That’s no way to conduct business. I talked more about working with commercial contractors in this article.

While I am thinking about it, be darned sure that your markup is running at least 1.45, preferably 1.50 or even higher. Remember, there are not that many electricians out there so you can charge pretty much whatever you want and get it, assuming your numbers are reasonable.

Business should be win-win. It isn’t a subcontractor’s job to finance a project, and it also isn’t the general contractor’s responsibility to finance a start-up business. Ask for a reasonable down payment. Treat others as you wish to be treated and you’ll find yourself with plenty of jobs to get your business up and running smoothly.

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