No Final Project Payment Means No Final Profit for Your Business - ResidentialSystems.com

No Final Project Payment Means No Final Profit for Your Business

"How can one be in a position to collect the final payment when the client isn't sure if they have accepted the system yet, because they aren't sure if it does everything they expect it to do? They constantly want this tweaked and that adjusted and have us run around like bloody fools trying to make them happy when they really have no idea what will make them happy. Then they scream when we ask to be paid saying they will pay us when we are finished, whatever the hell that is supposed to mean".
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"How can one be in a position to collect the final payment when the client isn't sure if they have accepted the system yet, because they aren't sure if it does everything they expect it to do? They constantly want this tweaked and that adjusted and have us run around like bloody fools trying to make them happy when they really have no idea what will make them happy. Then they scream when we ask to be paid saying they will pay us when we are finished, whatever the hell that is supposed to mean".

Sound familiar? (Actually, he used different adjectives to describe his clients.) Think about this: the last 5-15 percent of the monies you collect for any project represents your overall profit on the job. You probably lost money on any project where you could not collect the last payment. So, how do you make sure you end up collecting everything that is due to you? In the final analysis, there are really only four reasons why a client doesn't pay you the last percent payment:

1) They can't pay you
2) They can pay you but won't pay you
3) They can pay you but they don't pay you, because you didn't invoice them
4) They can pay you but don't think they should pay you because they don't believe you are "done."

Number 1 above amounts to just pure bad luck-near the end of the project during the final install, your client gets divorced, the house burns down, etc. There is really nothing you can do about these situations except make sure that at any time (other than maybe the final installation phase) you always have collected more money from your client than you have spent. If your final installations take more than two weeks, consider including in your client agreement that you shall receive a progress payment midway through the installation. The worse that can happen is that the client says "no way." You should, however, always try to get an installation progress payment on any job that includes a software configurable system.

Number 2 is perhaps the worst scenario, because you may become emotionally involved in the process. Here you are having met all your promises, and the client refuses to pay you, or worse yet, offers to negotiate a new final price. These types of clients are the ones that should have never become clients in the first place. Learn to trust your gut more and fire at least five percent of your potential clients each year; you'll make a lot more money in the long run.

Number 3 is where many companies lose tons of money. The biggest culprit here is usually the lack of a consistent change-order system that accurately keeps track of and acts on all changes (adders, deducts and no-charge change orders). Ask yourself this question: does each and every installer and project manager know what your change order system is, and does each of them follow this procedure 100 percent of the time? If you are unsure of the answer, then the next time everyone is together, take five minutes and ask each of them to write down the answers to the following three questions:

a) How do you determine if a requested change is a change order or part of the base proposal (I actually like the word "presentation" better than proposal)? Who prices the change order?

b) How do you determine who is authorized to make changes on a project, and what the maximum amount is that they can spend without needing further authorization?

c) When an adder (change order for more money) occurs, do we invoice the client immediately for the change order or do we add it to the total cost of the proposal and simply notify them of the difference in cost? In either case, do we act on each change order or do we wait until several change orders have occurred and then "bundle" them together? If we add the costs to the total cost of the proposal, does it get added to the amount owed at the end of the project or do we ask the client to make a "catch up" payment so that we don't have too much money owed at the end of the project?

If you have a well-defined change order process that everyone in the company understands and follows, chances are you will never be in a position where your client doesn't know how much money they owe you. More importantly, you won't find yourself spending two or three weeks after the job is finished trying to reconcile all the change orders that occurred that were never summarized or billed for. The more time that goes by after you have finished the job before you final bill the client and the greater the amount of cumulative change orders, the greater the chance that they will end up not paying you 100 percent of what is owed to you.

Number 4 represents one of the biggest complaints I hear echoed by many custom installation firms. Clients who don't think they should pay you the last payment tend to fall in one of the two following camps:

1) You and the client disagree as to what "done" really means.

2) Your company hasn't been able to get the project "done" even though you know what "done" is supposed to be for this client. Both of the above scenarios represent a long-term problem that, if left unsolved, will ultimately cost your company tens of thousands of dollars.

So what does "done" really mean? Ask your project managers and installers to write down their definition of what it means when the project is "done." Their answers will surprise you. Here is one that I like: "'Done' is when your company has furnished, installed, programmed and tested all of the items that are part of the project scope agreement, to the satisfaction of the client. When you leave the jobsite, there is no debris left behind that you generated, you have trained the client on how to use his/her system, and they are so pleased with your performance that they write a letter of recommendation to future clients."

That's right, set the bar really high the first day you meet with every prospective client. Tell them that your expectation is that they will be so pleased with your company's performance that after the project is complete, at your request, they will write a letter of recommendation to future prospective clients. Thereafter, only consider a project "done" once you get the letter of recommendation from each and every client.

To be done one first must know what has to be done. This is where a well-written "scope agreement" comes into play. (Don't use the word "contract;" use "agreement" instead.) So, how does one write a "scope agreement?" Here is the outline that my company uses for our theater presentations (which are really scope agreements) to our dealers:

a) A "Summary" section with a general description of what we are suggesting (not proposing) be furnished, and the cost range of how much each portion of the theater will cost.

b) A "What Is Included" section detailing what we are doing, along with a specific description of each portion of the theater (actual theater elements, seating, freight and site assembly), including the costs once again.

c) A "What Is Not Included" section that IDs and describes items and services that our accounts might somehow think we are doing.

d) An "Assumptions" section listing all the assumptions that we have made in coming up with this presentation and pricing, including any work or items that must be supplied by others, a listing of the information which has been previously supplied to us, and written disclaimers describing what happens if the assumptions turn out to be incorrect.

e) A "Next Steps" section where we lay out payment schedules as well as project timeline commitments. We have learned to present timelines as "allocated time periods" and not absolute dates as we are always at the mercy of outside influences such as other contractors, trade professionals such as the interior designer and/or architect, and of course the ability of the client to make decisions quickly.

Scope agreements for theater interiors can be as easy as cutting and pasting presentations into a new Word document and remembering to change the pricing. They should be very detailed and leave very few questions unanswered regarding your company's responsibilities. You should take great care in trying to accurately portray visually what the client will be receiving (we normally supply 3D renderings and CAD drawings of the room). In general, it is fairly easy to generate a scope agreement for any type of product or service that can be easily described to the client.

First, create a series of "standards" for each sub-system or product that is software based, and stick to them. If you decide that the upper right button on every lighting control keypad will always be the "entry" button for that room, learn to sell the advantages of standardization and don't let your clients start customizing your standard configurations. Having a standard way to approach each option or item makes it much easier to describe what you are offering, because you will have a greater chance of understanding what it is you are proposing to do.

Next, stay away from allowing "hours" for programming when pricing a project.

The average client has no way of determining how many hours should be allocated for any specific programmed item or series of items. As an alternative, if you are going to use a programming-based variable in your pricing, make it something that the clients can track themselves. Using the lighting control example, instead of allocating "60 hours of button and timeclock programming," you could allow for an initial baseline programmed system upon occupancy, followed by a system "tuning" three weeks after occupancy. This should be based on the client filling out a worksheet that you provide, with four hours of on-site tweaking alongside the client, and ending with a final sign off eight weeks after the system has been operational where you allow four additional hours with the client to make any final changes. In this example other than the baseline programming, all the additional programming time is based on spending time with the client that the clients can themselves keep track. A well prepared client will get far more programming tweaks done in four hours than a client who hasn't really thought about what changes they would like to see. The downside of using this approach, however, is that it exposes yet another problem with software-based products in getting to "done"-they often require a "learning period" for the client to become acclimated and discover how they really want the product or sub-system to operate. In these situations you definitely want to renegotiate down the percentage retainer that the client holds back, making sure you collect some money each time you hit a programming milestone.

Finally, learn to under-promise and over-deliver, especially when it comes to software-related items. Don't tell clients all the incredible tricks that your gifted programmers can do with the products and systems you sell. Instead, practice becoming a true consultant and tell your clients how they should have their systems set up in lieu of asking them what they want them to do. That way it is far easier to put down on paper what the system or product will do because you are the one defining what it should do vs. the client dreaming up scenarios and macros that you implied could be done.

You're not done yet, and because of that you can't get paid. The installers who worked on the project, however, expect to get paid, as do the project managers, the outside salesperson, the warehouse people and your suppliers. Having a single project in this situation isn't good, but unless it is a $500K project, it won't put you out of business. If you start having too many projects that aren't done when they are supposed to be done, then that could put you out of business.

Assuming for a moment that everyone knows and agrees on what "done" is supposed to be, you can be "not done" for one or more of the following reasons:

1) Reasons that are truly not your fault that the client knows are not your fault.
2) Reasons that are truly not your fault that the client doesn't know are not your fault.
3) Reasons that are truly your fault.

Reasons that are not your fault and the client acknowledges are not your fault are important to identify, because they will also help you eliminate "2" above.

Why does the client know you aren't at fault? It is probably a combination of obviousness (the client was supposed to select speaker cabinet finishes but left for Europe before they could do so which held up ordering the speakers), good communication (maybe you provided the client with a bi-weekly summary identifying the areas that were both on and off track and the reasons items were behind, if applicable), and a well-defined scope agreement (your timeline was given as a "time period" after approval from the client and the client didn't approve the final size of the screen until three weeks later than anticipated). Constant communication is the key to solving all of these problems. If the GC or architect is holding you up and might affect your ability to finish the project, ask for a conference call to help "solve" the problem (and subtly point out to the client that there is indeed a problem caused by others). If done right, you won't end up hanging the other trades out to dry, and you will increase the likelihood of not being blamed further down the road.

What happens if the job is delayed for reasons beyond your control? How does that affect your progress payments, etc? First of all, you must recognize that a job that continues to be delayed will ultimately cost your company more money to complete than a similar job that finishes on schedule. Examine your "scope agreements" and see how you have addressed the issue of "project stall" or project delays. Items that you've purchased that are sitting in your warehouse waiting to be installed have a greater chance of becoming broken, obsolete, stolen, damaged, etc. Make sure you charge some additional monies if the job is delayed through no fault of yours by more than a certain number of days. Make sure any commitments you made regarding completion periods are able to be re-negotiated after a certain time period. Make sure that you receive more money for jobs that are delayed.

Now we're down to the last issue: reasons that are your company's fault. In most cases it boils down to one or both of the two P's - People or Products. If it is people-related, your company hasn't been able to properly schedule resources such that the project could be finished on time. Unfortunately most custom installation companies use overly optimistic estimates of technician time (labor) that results in overages of between 20-100 percent. The two biggest culprits seem to be overly optimistic field utilization efficiencies by management (they want to see 82-plus percent but the reality is 56-75 percent) and a fundamentally chaotic business that makes it difficult to be able to focus on finishing any job without outside distractions. If you want to increase your field utilization efficiencies, you must start measuring either each field technician individually or each crew. If you don't know what to measure, simply take the projected sales value of your allocated labor hours and divide that number by the actual labor costs to complete any non-warrantee project. Projects that come in under budget (or less over budget) will have a higher number, and what you are trying to measure is the relative progress you are making vs. what the absolute number really is.

The other reason you sometimes can't get to "done" has to do with not having the products you need when you need them. You can spend all sorts of money on project management software and put the most sophisticated purchasing system in place, but if you haven't selected supplier partners that consistently deliver quality products with predictable lead times, you will invariably fall flat on your face. Companies that have fewer quality issues and can deliver faster have a significant strategic advantage compared to their competitors. Make sure you are properly accounting for the savings to your company when you are analyzing which company to support within a particular category.

Getting to done on all your projects is not an easy task. Once you define what "done" means for your company, there will undoubtedly be a host of issues your company will need to tackle. Realigning the way the entire company approaches how you grade yourselves from the client's perspective will most certainly be challenging. One thing is very certain: if you can get to the point where you are collecting 100 percent of what is owed your firm and each and every client becomes an avid supporter of your firm, you have achieved Nirvana in the custom installation industry.

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