The TeamOS Brief | Issue 7

Billing ahead is a good habit. Spending it is how good contractors get hurt.

You log into the bank on a Monday morning, see $2.0 million in the account, and for a moment the company feels safe. Then you remember how much of it was billed ahead on work your crews haven't built yet.

More than half of contractors, 55%, told AGC this summer that they'd had projects canceled, postponed, or scaled back in the past six months. One in three blamed rising costs.

Here's why that matters for your bank account. When a job stalls, the cash you billed ahead on it stops being a cushion. It becomes work you owe and may now have to deliver late, at higher cost, or give back.

Two weeks ago we talked about the first honest WIP report. One of the first things it shows most owners is how much of their cash is really customers' money. That's this week.

I like overbilling

Let me say this clearly, because a lot of advisors won't. I like clients financing our operations, not the other way around. Billing ahead of your costs is one of the best habits a construction company can build.

Think about it as a ladder:

• Underbilled. You've done work you haven't billed. You're financing your customer's project.
• Billed even. Cash follows cost. Better, but you're still carrying payroll and suppliers until the check clears.
• Overbilled and managed. Your customer is financing the work. This is where you want to be.
• Overbilled and spent. The billed-ahead cash went to overhead, equipment, distributions, or another job's overrun. Now you're borrowing from next year's work to pay for this year's.

The top of that ladder and the bottom look identical in your bank account. That's the problem.

Two kinds of money in the same account

Your balance sheet already separates them. Billings in excess of costs sits there as a liability, because it's work you still owe. Your bank doesn't separate them. It just shows one number.

Here's the rough math I do with owners. Say the bank shows $2.0 million. The WIP says the company is $1.4 million net overbilled. The cash you actually own is about $600,000.

Now ask how many weeks of payroll and overhead $600,000 covers. That's your real cushion. For a lot of companies, it's a very different number than the one they feel when they log into the bank.

I've watched overbilling jump by millions in a single month. The bank balance jumped right along with it, and everybody in the building felt rich. Nobody had earned a dollar of it yet.

When it goes wrong

Overbilling doesn't hurt you when it goes up. It hurts you when it comes down. That happens three ways:

• Jobs mature. It's easy to be heavily overbilled when your jobs are 40% complete. At 80% complete, there's less left to bill ahead of. The position shrinks on its own, and the cash goes with it.
• Jobs stall. A postponed project stops billing, but the work you billed ahead on still has to get done.
• Volume drops. When new jobs aren't coming in to replace the old ones, there's no new billed-ahead cash to cover the old one getting used up.

Any one of those, with the cash already spent, and a profitable company can find itself short on payroll.

The warning side is underbilling

Here's the part that surprises owners. A company sitting at a million dollars overbilled with a good cash forecast doesn't worry me much. A company sitting at a million dollars underbilled does.

On paper, underbillings are an asset. Work done, not yet billed, money coming to you. In practice, a big underbilling usually means one of three things:

• Billing is late. Work got done, and the pay app didn't keep up. Fixable, and expensive every month you don't fix it.
• A change order is being worked on but hasn't been executed, so you can't bill it yet. You're financing the customer's change.
• The job is over budget, and the cost to complete hasn't caught up. The underbilling is a fade that hasn't been booked yet, and you'll never bill it.

The first two are cash problems. The third is a margin problem wearing a cash problem's clothes. When the WIP shows a job underbilled, ask whether we can ever bill it before you ask when.

The Monday habit

Here's what I install with finance teams, and it takes about twenty minutes a week:

1. Bank balance, today.
2. Net over- and under-billing position, from the latest WIP.
3. Bank balance minus net overbilling. That's cash you own.
4. Payables due in the next 30 days against receivables you actually expect in the next 30 days.
5. A rolling 13-week cash forecast, updated with last week's actuals, so the forecast gets better every week instead of staying a guess.

The first few weeks, the forecast will be wrong. That's fine. Put last week's actuals next to last week's forecast, ask why they're different, and adjust. By week eight you'll know which customers really pay in 45 days and which ones only say they do. Receivables timing is the hardest number to predict, so estimate it conservatively.

Then one rule for the leadership team: equipment purchases, distributions, and new overhead come out of cash you own, not cash you're holding. If you want to spend billed-ahead money, it's a decision made out loud, with the forecast on the screen.

Keep billing ahead. Just don't confuse the two numbers.

Why this matters for owner independence

In most construction companies, the owner is the only person who knows how much of the bank balance is spoken for. That's one reason the owner can't take a real week off. When the leadership team runs the Monday cash habit, that number stops living in your head, and the decisions that depend on it stop waiting for you.

Take this to your leadership meeting on Monday

1. What's our net over- or under-billing position today, and what's the bank balance minus that number?
2. How many weeks of payroll and overhead does the cash we own cover?
3. What did we spend in the last 90 days that came out of billed-ahead money, and would we make the same call again?

Next week: the one monthly meeting between the field and the office that keeps the WIP honest, and who has to be in the room.

Let's go win.
Carlos

P.S. The real question is where else your team still depends on you. Get your Owner Independence Score in 3 minutes. If you'd rather talk it through, book your Owner Independence Review with me. In 30 minutes you'll know what you have to do to reach owner independence.