In its most basic form, a bid is the sum of estimated project costs, overhead expenses, and net profit margin. There are countless factors that must be considered when drafting a bid, and in some ways, it can be more of an art than a science. One job that goes wrong could take years to financially recover from.
Click here to read our guide to calculating your profit margin
Here are 3 bidding mistakes that are putting your profit margin on the line:
Pitfall #1: Profit is Caught Up in Retainage
If you build in a 10% profit margin and your general contractor is withholding 10% retainage, stop kidding yourself. You are dependent on that retainage in order to make money on the job, and you shouldn’t be. Waiting to pull a profit from retainage leaves you at a huge risk of a cash flow shortage until the job is completed and your retainage is paid out, which can take a long time to be released.
You might think, “Well, that’s all right! I have another project that is wrapping up now, I’ll get my retainage from that, which will be my financial cushion.” Answer: It’s not all right. What if you have a common setback like a weather delay? Or if one of your subcontractors, material suppliers or vendors make a mistake on the job or their costs suddenly increase? What if the property owner is delaying payment to the general contractor for an outside reason? Essentially, what if that other job’s retainage payout doesn’t come by the time you need it or worse, doesn’t come at all?
Given the construction industry’s chronic problem with payment delays, leaving your profit margin tied up in retainage is one way to lose it.
So before you bid, be sure you know how much retainage the general contractor will withhold. If it pushes your bid far above your comfort level you can attempt to negotiate a lower retainage but if that doesn’t work, you’ll need to increase the amount of your bid to ensure that for each billing, you’re bringing in some profit.
Pitfall #2: Not Accounting for Overhead Expenses or the Cost of Capital
There aren’t many subcontractors operating today without funding from outside sources. Whether you use a factoring company, bank line of credit, SBA loan, merchant cash advance, or mobilization funding, no funding source is free. The cost of the funds you need must be built into the project costs of your job (or depending on the type of capital, into the overhead calculations), rather than digging into the project’s profit margin.
If you have an established relationship with a lender, you can use a term sheet or other breakdown of the cost of the funding you need for this particular project and include that in either the project costs or overhead expenses in your bidding calculations. If you will be securing funding for the first time on this job, do some shopping to identify the lender you want to work with first, and get a cost estimate based off of your business’s needs and expected cash flow.
Note: Beyond the term sheet, be sure you understand the details of your agreement with that lender. For example, if you are working with a factoring company and your rate doubles if the invoice takes more than 30 days to be paid, you may need to use that higher figure in estimating the cost of that capital.
Pitfall #3: Lowballing a Bid to Land a Dream Job
Many companies will submit an artificially low bid, thinking that by accepting a lower profit margin now, they will land the big job they’re looking for and open up bigger and more profitable projects going forward. (You might also think you can generate profit through change orders, which is another risky approach.)
The problem is that if anything goes wrong, that ambitious new project could mean financial ruin for your company, late paychecks for your employees, delayed payments to your vendors and sleepless nights for you, the business owner.
This puts you on thin ice from the start. Murphy’s Law states that whatever can go wrong, will go wrong, and there’s an awful lot that goes wrong on construction projects. When you start to feel that ice start to give way, you will be forced to do things you normally wouldn’t, like cutting corners on the job, taking out last minute daily debit or Merchant Cash Advance (MCA) loans you can’t afford and ultimately, damaging your reputation with the general contractor you were trying to impress in the first place.
Subcontracting companies are known for operating on thin margins, but that doesn’t mean you have to. If you’re still reading this article, you likely have experienced the disastrous results of at least one of the pitfalls listed here. You understand the problem, and how easy it is for everything to turn upside down. You deserve to sleep soundly at night, to take regular paychecks home to your family, and to be compensated for the risk you took by being an entrepreneur in the first place.
Yes, if you avoid these common mistakes, you likely will be bidding more than your competitors, but the economy is booming and the iron is hot. Your work is valuable, and it’s needed now more than ever.
Now go out and get paid.
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Decreasing Profit Margins in Construction & What You Can Do to Protect Yours
Lien rights in the United States are your security and protect your commercial construction business so that you can get paid for your work. It’s similar to a bank giving you a mortgage and then placing a lien on the property. The bank never forgets or fails to place that lien to protect their rights, and you shouldn’t either.
In this blog, you will learn the following:
- What a lien is
- Who has mechanics lien rights
- Why a lien is important
- How to file a lien & alternatives to doing it yourself
- How much it costs to file a lien or send a notice
- How the lien process works
What is a lien?
Liens are utilized for all sorts of property. When a person takes out a car loan, the loan provider is a lienholder that retains the title of the vehicle, preventing the owner from re-selling that car until they are repaid. If the car buyer fails to repay that loan, the lienholder has the right to repossess the vehicle and sell it to recover the amount borrowed.
It is not unlike what happens with mechanics liens. Contractors, suppliers and other parties perform work and then are repaid over time as they progress through the job. Due to the construction industry’s problems with payment delays, the subcontractor needs to have enough money available to cover their payroll, materials, bond premiums, equipment leases and more.
What is a mechanic lien?
A mechanic’s lien is a legal, public document that is designed to guarantee payment to builders, contractors and construction firms that build or repair structures. The term comes from the 18th century, when “mechanics” referred to various types of tradesmen. In most states, a properly filed and executed lien can ensure payment by holding up the property from being sold, transferred or financed. Liens are generally enforced in court and result in a hold on construction project funds as well as foreclosure of the property to pay outstanding debts to the lienholders.
Who has mechanics lien rights?
Builders, contractors, subcontractors, material suppliers, architects, engineers, design professionals, or anyone who performs work or furnishes materials on a job site all potentially have mechanic lien rights.
Why is a lien important?
A mechanics lien is an official document filed with a government entity, (typically with the county) that ensures that the people and businesses who contributed to the construction or renovation of a property are paid.
How do I file a mechanics lien?
Filing a mechanics lien can be a pain in the rear, especially since the rules around them vary widely depending on the state you’re in. You can access free templates of lien notices online, but if you go that route you still need to file the documents yourself. The easiest way to ensure everything is done right is to use an online lien solution like Levelset.
How much does it cost to file a lien?
Filing lien paperwork has some related costs. The recorder’s office, clerk of courts or similar entity for your locality will most likely issue a filing fee. Online lien solutions tend to be very affordable — some cost as little as $19 per recipient for the Preliminary Notice — and they deliver big value for your business in return.
We recommend Levelset to our clients for lien filing. With Levelset and other solutions like it, you provide some basic details about your company and your project, and their team handles all of your filings for you.
|
Levelset Pricing |
|
|
Document |
Price
per recipient, as listed spring 2020 |
|
Preliminary Notice |
Free |
|
Notice of Intent to Lien |
Free |
|
Mechanics Lien |
$349 |
| Lien Cancellation |
$149 |
If you want to take the time to do it yourself, you can contact the state or county where your project is located and request information and assistance. But why the heck would you want to do that?
Here is a general outline of the process:
- 1. Send a Preliminary Notice via tracked, certified mail to the property owner that you are performing work or supplying materials on the job. Different states have different names for this notice, such as a notice to owner (Florida), a twenty-day notice (California), and a notice of furnishings (Michigan). The preliminary notice typically must be filed within 10 days of when you start the job.
- 2. After you have started the project, provided a Preliminary Notice AND a payment becomes overdue, the next step is to file a Notice of Intent to Lien, which is required in several states. The Notice of Intent to Lien is a warning to the property owner and if applicable, the prime contractor, stating that your business will file a lien on the property in the next 10 or 30 days unless you are paid. A Notice of Intent to Lien is a strong incentive to get the owner to make the payment, as they want to prevent you from filing that lien. Even if it is not required by the state, it’s a good idea to use it.
- 3. If you do not receive payment within those 10 or 30 days, you would then file a Lien on the property. Liens are filed in the county or municipality where your project is located, and in many states it is required to also send a copy of that lien to the owner and the prime contractor for the project.
Now that you’ve learned the basics of mechanics liens, you can start protecting your right to be paid for your work.
Have you had trouble with lien filings? Are you dealing with a general contractor that isn’t paying you for your work? Mobilization Funding’s knowledgeable team of experts are here for you. Click here for a free consultation, or call us today at 813-712-3073.
For many contractors, securing a commercial construction loan happens when stress levels are already high. The project has started and the crew is on-site or it is only a few days / weeks from starting. Payroll becomes an emergency — how will you pay your team while waiting for the GC to pay you? And how much time, and paperwork, is it going to take to get you the money you need?
There are multiple options for businesses looking for commercial construction financing, including contract financing, factoring, a merchant cash advance/daily debit and SBA loans, but there is no standard set of requirements for what you need in order to apply.
We developed this rough outline of documents and information you may be asked to provide when applying for commercial construction financing. Keep in mind, these may vary depending on the lender, your time in business, credit history and other factors.
Regardless of the type of loan you may want or apply for there is one thing that you should do in order to best help yourself get approved – be ready to tell your story. Your story should include the following:
- What is your business and what do you do? Imagine you are speaking to a third grader and they need to understand and explain your business after they hear it from you. If a lender doesn’t understand what your business does, how it makes money, and what you need the money for they will have a very difficult time approving you for a loan.
- Be ready to walk through how you got to the point you’re at right now and why you are seeking a loan.
- Your plan to repay the loan.
- Be ready to walk through your current financial situation — income statement, balance sheet, tax returns, and bank statements.
- Be honest, direct, and tell the Lender everything they need to know up front so there are no surprises throughout the process.
- Good lenders will run checks and see the problems that exist — it is much better for them to hear about them from you before they find them out on their own.
You may not be the right fit for every lender and that is OK. Give every process you enter the same effort and energy because you never know which one will be right for you.
Applying for commercial construction financing
The first step in securing almost any type of funding is to complete an application with the lending institution. The important thing to know here is that application formats can vary. Some lenders, like us, only require a single-page application that can be filled out in no time. Others, like those that offer government-backed SBA loans, can require many separate forms totaling dozens of pages that take you (and an accountant) weeks to properly prepare.
At a minimum, applications for commercial construction loans typically ask for the following:
- Business name, address, phone number and Federal Tax ID number.
- Details about the business owners (name, contact info, marital status etc.).
- Work history, including amount of time in business, scope of work and references.
- If you have any current legal judgments or liens against the business or the business owners.
For more information about financial planning, bidding strategies and project management for your commercial construction company, download our free e-book.
Commercial construction loan documentation
Once your application is complete, you’ll need to submit the supporting documentation. This step varies greatly depending on the lender and type of financing, but generally ties in with the requirements of the application.
Here’s what we require:
- 4 Most Recent Bank Statements
- Year-End Income Statement & Balance Sheet for Past Two Years
- Year-to-Date Income Statement & Balance Sheet
- Tax Returns for the Last Two Years
- Copy of your Contract
Most will also request professional licenses or government filings of your business, such as:
- Contractor’s or trade license for the state you are working in
- IRS Form stating your business’s Federal EIN Number.
- Articles of Incorporation
You can learn more about commercial construction financing here. If you found this information helpful, don’t miss our bi-weekly newsletter, Built for Growth. Click here to subscribe.
Answer 3 easy questions to start your application
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A common commercial construction billing mistake companies tend to make is to delay submitting an invoice or pay application for the work completed during slow months. Construction companies, in most situations, have work schedules that ebb and flow as their jobs progress. Busy and slow months are inevitable. Federal holidays and poor weather conditions often result in slow months in November, December and January. Sudden and unforeseen holdups are caused by other subcontractors on a job or something as straightforward as a delivery delay or permit problem.
When these problems arise and the contractor gets less work done on a job than they had expected, they can not bill for as much during that period. So rather than billing for the work, they will roll that small bill into the next month’s invoice.
Here are 5 reasons you should always bill for your work, no matter the size of the invoice:
Regular invoicing ensures that checks continue to flow in from your client.
Payment delays in the construction industry are a persistent problem. If you want to be paid consistently and on time, you need to be billing consistently and on time. This removes confusion that could occur with the general contractor.
Delaying commercial construction billing also delays invoice approval.
Double paying a contractor is a major concern for property owners and general contractors. Skipping some months and rolling them into one large bill often results in more scrutiny from the general contractor or project owner, slowing down the approval and payment process.
Keep your contract rights in order with scheduled billing.
Depending on the state, not submitting a pay application can result in a loss of your lien rights, or other contractual obligations.
Interruptions in receivables impacts cash flow.
No matter how insignificant a pay application may seem, incoming receivables can be used to pay job costs or operating expenses. Also, if you are working on multiple jobs those dollars can add up to more than expected. After all, your fixed overhead expenses don’t go away.
Delays in billing put more of your receivables at risk of non-payment.
Delaying billing leaves more of your needed capital on the line if a worst case scenario arises, such as the project falling through.
Mobilization Funding can help you avoid stretching your resources too thin. Our a unique lending program can help your company better manage its cash flow throughout the ups and downs of a job. Contact us to get started.
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4 Signs You Need to Hire an Accountant For Your Commercial Construction Business
Commercial construction contractors are in an almost impossible situation. The economy is booming, and public and private organizations are looking to build new offices, hotels, skyscrapers and more. But to make all that happen, organizations — and the general contractors they hire — depend on thousands of subcontractors who are willing and able to do the work right.
The construction industry is still considered a high-risk lender, despite all the demand, which means that few commercial contractors are able to qualify for traditional bank loans. And unless the contractor’s credit score is at least 600, most will not qualify for a Small Business Loan (SBA) loan.
Commercial construction companies need outside funding
Without the ability to secure financing, construction companies have to self-fund all of their project expenses out of pocket. Just in the first 30, 60 or 90 days of a job, a commercial construction company needs enough money on hand to cover the project’s expenses, including pricey bond premiums, plus labor and materials costs.
For short-term projects, the company may need to complete all the work before it can bill for the payment. And if the general contractor or project owner does not pay, it could take years for the business to recover.
This reality limits how many people a company can hire, supplies and materials they can order and equipment they can use. Everything is controlled by how much cash they have on hand.
And in an industry notorious for late payments and razor-thin margins, the risk is particularly high. It can take business owners years to build up a war chest that is sufficient to take on larger and more valuable projects. That, in turn, puts a huge strain on the companies who would want to hire them.
The trouble with traditional lending for commercial construction companies
The trouble with many funding options, however, is that the commercial construction industry has its own complex set of rules, regulations and standards. Lien rights, retention and the bonding system are nearly exclusive to construction and are misunderstood by most lenders.
Even though payment terms are set at 30- or 45-days, the average amount of time before payments are issued is actually 57 to 63 days, according to SageWorks. For lenders outside of the industry, those late payments by general contractors and property owners mean frequently dealing with expensive late fees. The resulting hit on the company’s credit score further disqualifies them from future low-interest loans.
Alternative lenders specific to the commercial construction industry have stepped in to solve this problem, allowing companies to take on more risk and grow to meet the increased demand for their services.
Mobilization Funding is one of those alternative lenders. Mobilization Funding began with the interests of a commercial contractor in mind. That means no late fees, and flexible payment terms set around your work schedule, allowing you to better cover the cost of bond premiums, labor and materials up front.
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There are many factors behind landing a winning bid. For upper-level commercial construction projects — especially for those lucrative government contracts — you have to prove that your company can complete the work for a competitive price and that you have the means to carry it through start to finish. A Financial Capability Letter can solve this problem.
Funding affects everyone on the job.
If you don’t have the financial ability to make payroll, cover the bond premium, secure needed equipment or pay vendors, your entire project can be put at risk. If one subcontractor on the job cannot afford to cover the necessary costs, they may cut corners, like delaying material orders or putting less labor on the job. Even worse, if a subcontractor fails to pay its vendors or is otherwise unable to complete the job, the general contractor and owner risk a lien being placed on the property.
For many scopes of work, like Structural Steel, HVAC, Electrical, Concrete and Sitework contractors, the cost of material orders, equipment and dump fees early in the project can be incredibly expensive. So for those trades in particular, having sufficient financing in place is critical.
General contractors recognize that this financial strain by a subcontractor can delay or drag out the job, stressing the project overall. However, there are very few subcontractors who are able to have enough cash on hand to do the project without outside funding.
A Financial Capability Letter proves you’re financially prepared to do the work.
Include a Financial Capability Letter in your bid package, showing you have the capital available to do the project right.
The letter, supplied by your funding partner, will state the following:
- The amount of funding available
- That the funding will be set aside specifically for that project
- The name of the project
- The name of the general contractor
Often in the form of a loan pre-approval letter, the Financial Capability Letter will state that your company’s financial standing has been verified. The letter also acts as an additional point of reference, making the general contractor or project manager feel more confident in your ability to complete the work on that particular project. In a competitive bidding process, this can make all the difference.
Pro tip! In the pre-approval process, secure a breakdown of how much the loan will cost, then build the cost of that capital into the bid.
If you found this blog helpful and informative, you may also enjoy our Built For Growth Newsletter. Click here to subscribe and get more tools and resources sent directly to your inbox every two weeks.
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Commercial construction contract financing is a way for contractors and subcontractors to borrow dollars they need for the early stages of a particular job by using the value of their contract as collateral for the loan.
Mobilization Funding, sometimes referred to as Mobilization Financing, is a commercial construction contract financing option for subcontractors who are otherwise unable to secure an SBA or traditional bank loan, but who need additional funds for the first few months of a project. It is a short-term option that allows you to borrow up to a certain percentage of the total value of the contract, then repay the loan with the dollars received from contract payments.
Here are a few things to keep in mind when looking for commercial construction contract financing:
This type of financing depends on the borrower having a signed agreement with general contractor, property owner, or the party is paying for the work. The contract will lay out a payment schedule, job requirements, the scope of the work that needs to be done, and the total value of the contract. While a lender can often offer a type of pre-approval for a job that the applicant is bidding on or considering, in almost all cases a loan cannot be issued until the contract is awarded.
Learn more about commercial construction financing.
In order to secure commercial construction contract financing, the lender typically requires that the borrower sign a document guaranteeing that all payments on that contract will flow through a controlled account until the loan is paid off. Unlike some other construction loans, the borrowed dollars are restricted to expenses for that particular job(s).
Commercial construction contract lenders typically require that the borrower has been in business for at least two years and be able to provide bank statements and some financial documents.
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Most lending partners ask for verifying paperwork during the approval process, including copies of driver licenses, Articles of Incorporation, and an SS-4 form notice. The SS-4 form notice, also known as an EIN Confirmation Letter, verifies your Employer Identification Number (EIN). Why do we need to verify your EIN? An erroneous or invalid EIN can lead to all sorts of headaches, including tax return conflicts and even a potential tax audit.
The good news is that verifying your EIN is easy — all we need is your IRS-issued SS-4 form notice.
What is an SS-4 form?
The SS-4 form is used by businesses to request an EIN from the IRS. If you don’t have an EIN, then this is where you’ll start. Most lenders, including us, can’t help you without an EIN. You can access a PDF of the SS-4 form by clicking here. Once the form is complete, you can mail or fax it to the IRS.
When you receive your EIN, the IRS sends an EIN Confirmation Letter. This is the verification your lender needs to approve your loan.
What to do if you don’t know your EIN
Some business owners discover that they don’t know their EIN. If this happens to you, don’t panic. Your bank should have your EIN on file — you most likely had to provide it when you opened an account for your business. If not, you can request the number from the IRS by completing an EIN 174c Verification Letter.
How to request a copy of your SS-4 Form Notice from the IRS
If you know your EIN but can’t find your SS-4 form notice confirming your EIN, there are a couple of ways you can get a copy. If you have an accountant, they may have completed your EIN application for you and have a copy of the confirmation notice. If that doesn’t work, head to the bank. Because most banks require an EIN to open an account, they verify the provided EIN with an SS-4 notice. Ask your banker to provide you a copy.
If all else fails, you can request a replacement copy by calling the IRS Business & Specialty Tax Line. The phone number is (800) 829-4933, and the line is open from 7 a.m. to 7 p.m., taxpayer local time, Monday through Friday. The tax specialist will ask you to provide your EIN and some identifying information about your business. Once they have verified your identity, you can request an SS-4 form notice to be mailed or faxed to your business. The IRS will only mail or fax to the address or number it has on file for your business.
You probably don’t need anyone to tell you this, but getting documents from the IRS can take awhile. This is why it’s a good idea to prep your documents before you start applying for a loan. You don’t want to be waiting on an SS-4 form when you need the money now! Ask the tax specialist how long the expected wait will be.
If you have other questions about applying for a commercial construction subcontractor loan, check out our Commercial Construction Financing Questions page. If you found this blog helpful and informative, you may also enjoy our Built For Growth Newsletter. Click here to subscribe and get more tools and resources sent directly to your inbox every two weeks.
Few commercial contractors have the luxury of paying the full up-front cost of a project without help along the way. But often, they wait too long to seek that additional funding, which can put unneeded stress on the project itself or even the business overall.
Due in part to the Great Recession a decade ago, most general contractors have done away with the practice of making upfront payments to their subcontractors. As a result, subs will be on the job site for 30 or 60 days before they can submit a pay app for that work, and then it could be another 30 or 60 days before they receive that payment. Throughout that time, they still need to make payroll, cover material costs, equipment and insurance.
Most contractors need additional funding, but where can they get it? Many lenders, from banks to factoring companies, will not issue funds even to well-qualified or established businesses until they have an actual approved pay app or receivable. Unfortunately, by that point those businesses often find their project cash flow already stressed.
You don’t need to wait that long for the capital you need. Late payments to vendors or supply houses (and late payment fees) may not be necessary after all.
When should you start looking for funding?
Consider the cost and method of any needed capital during the bidding process of a job. Often, owners wait until after a job has been awarded and then scramble to find funding when it’s most needed, which can limit their options and force them to take out a more expensive loan. That scramble can be avoided. No matter what type of lender you plan to use, it’s always wise to identify the amount and cost of a loan so that it can be built into your bid price.
The Mobilization Funding difference
Mobilization Funding, LLC goes a full step further. We talk to many of our clients even before they bid on a job and provide a straightforward breakdown of the cost of the loan, catered specifically to the project they are considering so that it can be built into their job costs. The funds are issued upon the start of a project, or at the time they are needed by the borrower. The repayment schedule is then organized according to the project’s payment schedule. In other words, the loan schedule is designed so that the business can repay the loan with the payments they are receiving from the general contractor through the normal schedule and process.
Mobilization Capital, also known as Mobilization Funding, is a type of loan that can help you avoid stretching your resources too thin in those first several months of a project. It’s a unique loan option offered by a small number of lenders. Contact us to get started.
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Construction projects are capital-intensive and, unlike many other industries, the company undertaking the work — that is, the subcontractor — puts in a considerable amount of work before billing and months before receiving payment for its services. Many commercial contractors have a hard time securing traditional funding. Alternatives are available, but how do you decide which is the best for your business? When seeking a construction loan, you should consider the following factors in deciding which loan to pursue:
What is the capital for?
Commercial construction loans are often used to cover any number of a business’s needs, such as the cost of leasing equipment, payroll, materials or bond premiums. The more specific, the better.
How much money is needed?
Prior to seeking a loan, examining your current financial position will give your business a better long-term picture of your true lending needs. For larger loans, the input of a Certified Public Accountant can help to ensure that you are seeking the appropriate sized loan for your company.
Once you have pinned down the purpose and amount of capital you are looking for, you can move on to identifying the appropriate loan.
Here are some additional questions to consider while making your decision:
Is your repayment schedule in-line with your pay apps?
Be sure to have a full written breakdown and understanding of when your payments are due and what the penalties are for late payments in case of a change order, weather delay or other holdups. Hidden fees and penalties can add up quickly and result in a more expensive loan than you had anticipated. Some funding options, like Merchant Cash Advances, auto-debit hundreds of dollars from the borrower’s account every single day. If you will only be on a project for another three months and you have a six-month payback period on an MCA, then you need to know you have more work starting quickly and enough work to be able to actually afford the same daily payment in months four through six of the repayment period.
Surprised? That’s just the beginning.
Check out our Guide to Merchant Cash Advance Loans.
Can you build the cost of financing into the bid amount or project costing?
The key here is anticipating which jobs you will need additional capital for rather than waiting until your coffers have started to run dry. Building the cost of financing into your bid amounts will allow you to keep your profit margin at your projected amount.
What is the total cost of the loan? (Including closing costs, interest and additional fees)
No loan is going to be free, but you should have a solid understanding of the cost of that capital before signing on the dotted line.