Construction mistakes that drain cashflow

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Pierson Villarrubia
Pierson Villarrubia

Is managing cash flow one of your biggest headaches? Controlling cash flow is difficult for any company, but construction cash flow problems are some of the worst.

It’s critical that companies in the industry address the practices that drain their cash, and build good cash flow management practices to prevent future problems.

Join this free webinar with construction financing expert Pierson Villarrubia  to learn how to address these cash-draining situations when they arise and ultimately how to avoid them in the future.

You’ll learn about:

  • What mistakes drain cash flow
  • Why managing cash flow is key to survival in construction
  • Solutions to keep you cash positive

Transcription

Pierson Villarrubia (00:00):
The next slide here, a real quick background on me. Uh, I was a contractor before coming to Levelset. Um, and then for years, I worked here with our team on lien rights. Uh, I’ve worked with thousands of contractors, subs, GCs developers, um, to suppliers and equipment rental companies across the U S with putting those kinds of systems and processes in place to protect their cash. Um, and then now I am on our materials financing team where we put money out in the street to cover materials purchases, uh, for contractors when they need them at the start of the job throughout projects, making sure that they can keep on working. Um, and my email’s right there. Obviously, if you guys have any questions after this, I will be available. Uh, shoot me an email if it’s something from this or something that we don’t cover, I’m happy to talk to you guys about it.

Pierson Villarrubia (00:55):
Um, and without further ado, let’s move into the actual content. All right. We’re keeping it rolling. Oh, okay. Maybe not just yet one more slide. Yes. Yeah. So that was my background Levelsets background. As mentioned, we worked with thousands upon thousands of contractors, suppliers, equivalent rental companies, uh, with their lien rights, making sure that their cash flow is covered. Um, making sure that they have great risk reports on projects that they’re setting up and they know what they’re walking into before they show up on site. Um, everything that touches, how can we make sure that we’ve got cash on hand to keep moving? Uh, so if you’re so inclined go to Levelset dot com, which if you’re here, you probably have, but keep using us. We’ve got plenty of free resources, highly recommend that you use those to your advantage. So why is it so hard to stay cash positive in the first place?

Pierson Villarrubia (01:54):
Well, it’s because construction is hard. You guys know that upfront, as I mentioned, like cash is king cashflow cannot be more important than anything else within construction, besides the quality of the work that you’re doing, uh, upfront contractors subs, you have really steep, steep costs, uh, before any work is even invoiced in the first place where you have to have liquid cash to be able to cover, you know, upfront materials purchases, uh, permitting some of the labor that might need to be done ahead of time. If it’s AEC work, um, you know, cash is king. So from there, like any kind of cashflow concern that we run into, it’s going to start to snowball into something that leads to, I call it like a payment fire, but it’s just going to continue to build throughout the course of the project. And then it’s not going to end well.

Pierson Villarrubia (02:47):
And I’m sure everyone here has their like horror story or versions of that, that they’ve come across. Uh, but like when everything does go, right? So when it goes as well as it could possibly be imagined, the budget is already so tight in the margin is so thin that any small issue that we have avoided keeps us consistent with what we’re doing, but if we can avoid any of those hiccups along the way, then it’s a repeatable process that we could use to keep building our Casper cash position, which we could then use to reinvest back into the business or, you know, increase our profits. Um, so right here on the screen, it’s, this is like an illustration of a really a simple construction project. And from the get-go, this kind of lays out what we’re dealing with when it comes to the exchange of documents back and forth cash, uh, being, you know, trickled down through, I call it like the payment chain to where obviously starting with the lender and owner goes down to the GC.

Pierson Villarrubia (03:49):
They need to pay their subs, subs, pay sub subs. They all need to pay their vendors on time. Uh, but at the same time, those, you know, subs need to have either, you know, uh, deposit with some of their suppliers. There’s a specialty material that there’s a six week lead time on the needed deposit to get started on that. But they have been paid yet because the draw hasn’t been put out to where they can pay their material, their vendors on time, I’d gone around in the circle talking. But the point is it’s complicated. There’s a lot of back and forth transactions and interactions with, uh, like pay applications, lien, waivers, uh, change orders that are constantly revolving throughout the life cycle of a project. And every single time those are exchanged. It gives you not you in particular, but it gives room for error or it gives room for maybe a misunderstanding that can snowball into something bigger.

Pierson Villarrubia (04:41):
So really what we want to do. And we’re going to focus more on this. As we get into some of the solutions is building processes that can be repeated over and over again. And we understand that each project is different and we want to account for that. So the, the, the areas that we can all recognize that can be the same, let’s have a standard process in place that way it’s taken out of the equation. And the more that that’s done, the more consistent we can be, uh, from project to project and, uh, more consistent we can be with our cash on hand. So if you could go to the next slide care. So, uh, front, some of the most common things that you’re going to run into that tend to be a pain. Um, you want to click on that next one, high payroll, this isn’t going to change.

Pierson Villarrubia (05:29):
Um, you know, that’s going to be a significant chunk of where your money is going out every week, every two weeks, every month. Um, and especially, you know, the higher quality work you want to do the better kind of employees that you want to have, uh, in, in your employee, you’re going to need to have compensation for those folks bills and budgeting. This is everything from your standard, overhead, running the business itself to how do we budget for the next project and then budget for what we’re trying to bid and what we’re trying to win. Um, and then eventually is just the slow paying customers. And this can start at the very, very top, um, with the end owner of the project, but this can also be other contractors involved, uh, throughout the project that are delaying it for the folks underneath them. Um, and then like on top of this, when we look at we’ve got thin margins, it’s not listed here, but like the volatility with, uh, the, the change in materials, uh, meaning the price is involved to where everyone knows what’s going on over the last year with COVID the supply chains backed up over the last year, I was reading that, uh, like materials costs have increased about 25 to 26% on average, but at the same time, the average bid price has increased about 5%.

Pierson Villarrubia (06:50):
So those, what we’re losing on, on, uh, on the rising material costs is not really being accounted for in the bid price, because we’re trying to stay competitive. We’re trying to still win projects that makes our margins even thinner than they have been. So again, I’m going to keep harping on this, like being consistent with what we’re doing from, from job to job is going to make it to where we can slowly start to build up our cash position.

Pierson Villarrubia (07:21):
So let’s get into some of the things we can do. Um, so lien rights, consistency. Again, I’m going to hammer that, um, and then financing or mobilization. I’m not really gonna go in order here. I’m going to start off with a mobilization. So there’s a few different ways that we can get ready for the start of a project. How can we have cash on hand to cover what we need to get going? Um, pretty obvious one is, Hey, we need some kind of deposit from that customer, uh, which can lead to pushback from them, whether that’s, you know, we’d rather go with a bid that is not asking for money down from us, that way you guys can start doing the work. Um, but at the same time, having that put into the contract where, you know, you have secured cash up front to cover those initial costs, great thing.

Pierson Villarrubia (08:13):
Um, but th you know, they’re all gonna have the cons that come along with how are we going to get that cash up front? Um, the next one pretty, pretty obvious everyone in this room has dealt with this is just using the credit lines that your fenders give you. Um, at least with this, it can delay the payments that, you know, you need to make to your vendors for the materials that you need to get started upfront. Um, which is great initially, but like the downside to me. And I see it over and over again to where we, we do every year, we do a, uh, it’s like construction cashflow survey that we go that goes out to all the folks that we work with. And on average, it’s 65 to 70 to get paid for your typical like subcontractor. Um, and with everyone here in the webinar, I don’t know how many of you have, uh, you know, terms with your suppliers, where they would match up with that 60 to 75 days to where you’re having to still pay them at day 30, uh, at day 15, or maybe you need to put that deposit down to start the order.

Pierson Villarrubia (09:20):
Uh, so it’s still doesn’t sync up with when you’re actually being paid and you’re going to have to float, uh, some of the cash on hand for that project or from other projects to be able to get those materials paid on time. Um, but at least it gives you something upfront and something that we’ve been doing, uh, to address this, which I’m going to dig into, but it’s not the only way to look at the problem is the financing for materials upfront. So when we do that, we can cover the cost of the materials, pay those suppliers immediately. So they’re set up, they’re fine. And then at the same time, we could give folks like, you know, who needs that done 120 days to pay us back, which doesn’t usually go 120 days, but it’s really more of trying to sync up paying your, your debts when you’re actually being paid for your work. And this can be done with a line of credit, uh, with your bank. This could be done with traditional construction loans. Um, our thing is it’s just materials focused, uh, while there’s other things could be applied towards labor and other costs as well.

Pierson Villarrubia (10:31):
And then with that, like you use it to your advantage to where every job’s going to be different. And some, you might not need that financing for the materials or for the labor costs, but when you get the right one, you can write them into, uh, the bid upfront haven’t paid for, or if, you know, we’re buying those materials from the contractor. Um, I mean, not for the contract from the supplier and it’s going to be paid for upfront. Let’s see what kind of negotiations we can make on the cost of materials, if there’s a guaranteed payment forum and zero risk involved with the vendor overall. Um, so start just kind of like playing around with how you could use that cash on hand. Um, but really it’s just to be able to have the upfront costs covered and then keep you liquid for the costs that can really, you know, vary week to week like payroll, uh, with overtime or change orders coming in.

Pierson Villarrubia (11:29):
And then when we start talking about, I guess, yeah, change orders is a good way to do it. Uh, change orders. They happen on every single project, not every single one. I was kind of that kind of it wasn’t exaggeration, but they happen and you guys know that they happen. Yeah. Um, so they’re going to be frustrating and they’re not always accounted for the initial cost, the project. So as a best practice, it’s really, we want to communicate and have it in writing upfront, how are they going to be addressed? How are they going to be documented? How are they going to be accounted for? Um, and by doing that, you really gonna try to avoid many situations down the road where that’s, where disputes happen, uh, there around the change orders and the costs involved and the changing overall cost of the project. So creating a consistent approach to start of every job documenting.

Pierson Villarrubia (12:23):
This is how they will be handled. This is how they will be compensated for this is how there’ll be addressed. And it’s not something that’s been dictated, but it’s about opening up that conversation and being proactive with that customer, with that contractor to say, this is how it should be handled. Um, in a similar vein, we also have a retainage, so can be held on all a lot of construction projects. There’s a few states like Texas, where it’s required to be held a lot of times that is the profit for a contractor. Um, and I, it’s tough when you see people just agree to the retainers terms on good faith, not really in writing like every state has a set allotted amount of time for how long they can hold your retainage, uh, once you’ve completed your work or the project as a whole has been completed. So again, having that upfront and writing in agreement with your customer, with the owner of the project, um, because that’s, that’s a delay that gives you your profit after the project is complete. And a lot of times that’s what you’re going to need to be able to keep winning those, the jobs that are next on the horizon.

Pierson Villarrubia (13:36):
Um, another thing when we talked about bad faith, bad faith is maybe the wrong term, but just something to avoid when you can, is pay when paid clauses or pay when paid contracts, uh, cause they, they make sense where you are you okay? Well obviously you guys can’t pay me until you have the money to pay me from, uh, you know, the draw being dispersed or from the owner or whatever the case is. But what they’re doing is they’re like there are time shifting when they’re able to pay you. And by doing that, they’re really just transferring all the risk of nonpayment down the chain. And that’s when we talk about the snowball situations, that’s one of the cases where it, it, they happen really quickly where it, it sends a shock all the way down the payment chain where no one’s getting paid when they should be.

Pierson Villarrubia (14:29):
And then it reaches the vendor, then, you know, demand letters start flying, lean start coming on the property early, and then it just starts to be a tangled mess. Uh, so when possible, just try to push for, you know, pay if paid, if anything, but yeah. Try to avoid the pay when paid, uh, contracts if possible. Um, no, that’s not always the case. Uh, finally we have lien rights. So I know a lot of contractors, like you’d never walk on to a site and think, you know, I can’t wait to leave this job last furthest thing from your mind. Um, really you’re, you’re focused on the work. You’re focused on doing the best job that you can do, uh, with your trade, with the projects, making sure that you’re compensated for it. Uh, but lien rights are a fickle thing to where every single state is going to be different.

Pierson Villarrubia (15:23):
And then within that, every single project is going to be different. Whether it’s a residential job, a commercial job, public job, federal, they’re all gonna have different requirements up front. They’re just going to ask you to protect your ability to leave. That doesn’t mean that you do, you intend to actually lean the property further down the road. Doesn’t intend that or mean that you intend to be aggressive on the project. You’re really just wearing your seatbelt. So as we know that it’s important for every job, it’s something to wear. When you start to understand what’s required for those projects, what’s required for your state or the multiple states that you’ve worked in, then it’s about starting a standardized process of, okay, within the first 10 days, we need to send out this first document. Once that’s out the door, we’re going to be bothering the rest of the project and the deadlines involved and then have someone in the office that has ownership of that process.

Pierson Villarrubia (16:22):
Um, and this is really important because for one, the more you do of the very first step. So just protecting your ability to lean the less and less likely you’re ever going to run into Valene itself outside of really crazy circumstances. And by that, I mean, so I’m down here in new Orleans and, uh, two, almost three years ago now, uh, we had, uh, Hardrock cause I could see now, but it was a hotel collapsed, um, halfway through the project. Yeah, that’s a situation where just about, everyone’s going to have to be filing a lien and they had no part to do with, uh, bad faith on, you know, Hey, I’m trying to stiff ya. Uh, but if we’re doing the right things consistently at the start of every project, we’re communicating them with our customers, with our vendors, the less likely we’re going to be running into trouble on the backend.

Pierson Villarrubia (17:16):
Um, and then when we’re doing those the right way and uh, payment fire does happen. We know we’re in the right position to, to collect on it. We know we have valid lien rights and then that avoids a really costly lawsuits, uh, just flat out being burned, um, or just the complete and total delay of payment. Um, so really my thing to make it even more simple as just like, look at the avenues, you have to have cash available upfront, whether that’s through using your vendors, um, through using your customer for deposits, for using, uh, you know, capital resources like materials, financing, credit lines at the bank, uh, you know, traditional construction loans, being consistent with how you’re communicating on the project upfront when it comes to change orders, when it comes to lien rights, when it comes to your retainage. And when you have those, all the standard processes that you can repeat over and over again, that’s when we can start building and building our cash advantage to where we can reinvest it back into the business, into our marketing, into our labor force, um, into new equipment. So we can take on larger projects. Uh, so that’s, that’s the take, um, sorry, I’m kinda wrapping up here, but um, I think we have some questions next or if anything came in through the chat, I’m happy to talk about those.

Speaker 2 (18:49):
I’m not quite seeing anything through the chat yet, but one thing that did come to mind, um, was, you know, I know you mentioned some of the things about, um, financing and some of the other options, like line of credit, like, um, one thing that we didn’t touch on was factoring and what the difference between like factoring and, um, like financing your materials for specific jobs. Do you mind kind of touching on that for a second? Just so we understand the differentiators.

Pierson Villarrubia (19:16):
Yeah. I’m not, I won’t get too deep into it, but factoring is buying an invoice. That’s already been sent out while with the financing of the materials. We are, we’re paying the invoice right when it’s issued. So it’s already been underwritten and it’s understood the risk involved, and then we’re going to cover it right away while factoring that contractor, you know, receives the invoice that you have, the materials sent. Then they hand that invoice over to the factoring company, which will then pay it and then own the debt. So factoring tends to be a little bit more aggressive because they haven’t taken into account a lot of the risks ahead of time, which I’m painting with a broad brush right now, but it tends to be more aggressive because it’s a little bit more risky from the factory company’s perspective.

Speaker 2 (20:00):
Got you. Okay. That was perfect. You’re doing a great job at keeping things. Very concise. Thank you, Pearson. Um, we did get a question.

Pierson Villarrubia (20:08):
I talk fast. I’m sorry, everybody. That’s just how I grew up. I talk fast. So if you need me to shut up and slow down telling me

Speaker 2 (20:15):
You’re good and the good news is this recording will go out to everyone. Um, whether they attended or just registered so they can, they can listen and pause and rewind and go back as much as they need to. Um, so we did have a question come through from Gina and she says, state of California are pre lien suggested to be filed upon receipt of LOI or upon executed contract. Is that something you could speak to?

Pierson Villarrubia (20:40):
Yeah. And so after this, you know, we can send you over like our CEO when we started, Levelset he, the states, not the states, all of the state’s lien laws. Uh, we have them all spelled out like in plain English. You’re not just looking at like subsection barcode this to tell you what’s required. Um, my general rule of thumb is that you can send them early, uh, up to maybe four to three weeks before you step site on a project. But when the official like deadline, the ticker starts counting down is as soon as you step on site, uh, for, you know, labor for materials to start the project itself, you have 20 days to send out that prelims. Um, so as long as you have that in mind, you’re fine. But yes, California is a state where you can send it earlier than that. As long as you just know when that deadline actually starts, it’s when you arrive on site and not walking the site and see what we’re going to do, but to actually start the work.

Speaker 2 (21:43):
Great. She said, thank you. Awesome. Okay. So I am going to move on to the screen just so everyone has the opportunity to jot down your, um, contact info Pearson. And, um, but you know, we can, we do still have a couple of minutes. So does anyone have any lasting questions? Okay. Um, Nicole asked if we could talk a little bit more about terms and rates for material financing.

Pierson Villarrubia (22:07):
Yeah, for sure. Um, so I’m not going to give you the, the blanket rates because, well, the reason is we do it differently on each project. Uh, so at least with our materials financing, we’re using our expertise in lien rights first and foremost, to see how safe, how risky a job is to finance. So this means that folks with, you know, bad credit or a lack of credit, cause they’re a new business where they’re gum, you know, came from a really small business to where now they’ve got actual businesses accounts. That’s not as big of a deal to us as it would be the traditional lenders or for financing institutions. So if we look at the project that someone needs finance for materials, and we see that your lien rights are intact, we see that our lien rights are intact because we basically become the supplier.

Pierson Villarrubia (22:56):
At that point. Then we feel really comfortable with our ability and our expertise and lien rights to make sure that for one, you get paid for the work that you’ve done, which then enables you to pay us back. Uh, so for right now it’s a pretty low monthly rate and that’s the ceiling. So that’s 3% a month, uh, for 120 days until we’re paid back. Uh, but that really fluctuates and by fluctuate don’t mean up or down. I really just mean down, uh, depending on how healthy that project looks. So is the GC running it? Do they have a great reputation? Are there existing liens on the property? Um, that kind of stuff. So let’s say 3% a month for now, um, until it’s paid back. So for payback at day 30, it’s just that 3% we’re done. Um, but yeah, it gets lower than that, depending on the risk and the health of the project itself.

Speaker 2 (23:56):
Awesome. Nicole, I do hope that answered your question. If you have any follow-up questions, feel free to throw them in the chat. Um, or if you need some time to mull it over again, Pearson’s contact information is here. So, um, we’ll also be sending out a couple of, uh, pieces of collateral for you guys. I’m just spelling out a little bit more about financing, um, some information about lien rights. Um, I love the state specific question. Um, I can also add some great resources within the email. Um, so you guys can find more info out about all of the different things that you may need. Any other questions we’ve got about two and a half minutes left?

Pierson Villarrubia (24:36):
Yeah. Questions, or we could be the cool teachers that let you guys add before the bell rings.

Speaker 2 (24:42):
Yeah. I love that. Well, this is our last slide. Um, I just want to say thank you to everyone that came to this webinar. Our goal with webinars is always that you walk away having learned something. Um, so I do hope that you learned something. I work here and I always learn something new being on these webinars. So thank you so much Pearson for taking time out of your day as a financing expert, to be here, to, um, give us all of your insight and all of the things that you have learned so that we can move forward and, um, help empower our clients, our customers then, and just getting, um, getting people paid. Isn’t that the goal

Pierson Villarrubia (25:23):
Pay for the work you do. So, yeah. Thank you guys. Thanks everyone for attending and um, yeah.

Speaker 2 (25:29):
Thank you so much. Thank you. Bye-bye.