Read the payment terms against your cash flow before you sign
Work out when money actually lands under the proposed terms, then hold that against your wage bill and your supplier terms. If the gap does not work, say so before you sign: terms are negotiable then, and very rarely after.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
Once the terms are agreed, see how to get a full payment schedule written into the contract.
Why it matters
Payment terms get read once, at tender, by someone deciding whether the job is winnable. Nobody asks when the cash will actually arrive. Then you have a wage bill every Friday, a merchant account on 30 days, and a final date for payment 60 days after each application. You fund the gap from your overdraft, and the interest comes straight off your margin. On a big job that can cost more than the profit, and by then the terms are signed.
How to do it
- Mark the application date, due date and final date for payment for the first three months of the proposed terms on a calendar.
- Set your wage bill, plant hire and merchant payments for the same weeks beside those dates, and see where the cash runs out.
- Work out the peak funding gap in pounds, and what it costs to carry it for the length of the job.
- Propose shorter terms or a mobilisation payment in writing if the gap does not work, before you return the signed contract.
- Keep the cash flow you built with the contract file, so the decision to sign is on record.
Example
Illustrative example. The scenario and figures are invented.
The facts
A groundworks subcontractor is offered a £600,000 contract over 10 months. Applications are monthly, with payment 45 days after the due date. Its wages run to £40,000 a month and its merchant terms are 30 days. The commercial lead builds the cash flow before signing.
What happens
- The first application goes in at the end of month one for £60,000, and the money lands in the middle of month three.
- By then the subcontractor has paid three months of wages and two months of materials, with nothing in.
- The peak gap comes out at roughly £150,000, and the overdraft cost of carrying it across the job is about £9,000.
- Before signing, the commercial lead asks in writing for payment 21 days after the due date and a £30,000 mobilisation payment.
- The main contractor agrees the shorter period but not the mobilisation payment.
Cash position at the end of each of the first three months under the offered terms
| Month | Paid out | Received |
|---|---|---|
| Month one | £40,000 | £0 |
| Month two | £110,000 | £0 |
| Month three | £180,000 | £60,000 |
The outcome
The peak gap falls from about £150,000 to about £100,000, and the funding cost roughly halves. The subcontractor knows what it is carrying before the first spade goes in.
To have this set up for you, see our Late Payment Prevention service.