Negotiating a Down Payment or Early Payment
As a contractor, securing a down payment or early payment for your work is essential for maintaining positive cash flow. It's a critical element of a successful contracting business—or any business, for that matter—unless you're running a charity (which, in this case, you're not). This article is for contractors focused on making a profit and ensuring they’re paid in a way that keeps the cash coming in faster than it’s going out.
Why Ask for a Down Payment or Early Payment?
Just because a client says their standard terms are “paid-when-paid” or “paid at the end of the job,” doesn’t mean you have to accept them. Contractors often face significant upfront costs like sales, marketing, and overhead during the negotiation phase of a contract. That’s why securing a down payment or early payment is key—it ensures you have cash on hand to cover these expenses.
How to Negotiate a Down Payment or Early Payment
During contract negotiations or in your proposal, specify that your payment terms include a down payment or early payment. If a client is resistant to a down payment, propose an early payment—essentially a slightly delayed down payment. Some clients may refuse outright, while others might push back at the idea of paying anything before work is done. If so, fall back on the early payment strategy, which ties payment to completing specific initial tasks.
What Qualifies for Early Payment?
Here are some examples of early contract activities that can trigger an early payment:
Submission of insurance certificates.
Submission of performance bonds or other sureties.
Placement of major material or equipment purchase orders.
Submission of engineering drawings or similar documents.
Mobilization of field forces or equipment at the job site.
Negotiate to bill for these early activities, including not only the cost of the activity but also covering upfront expenses like overhead, sales, and marketing costs. Since early payment is tied to actual work, clients are more likely to accept it as fitting within their approved payment process.
The Size of the Down Payment
The size of the down payment you can negotiate varies, but here’s a guideline:
5% Down payment: Better than nothing, but small.
10% Down payment: Common and generally accepted.
20% Down payment: A solid number that can provide positive cash flow for the contractor.
30%, 40%, or 50% Down payment: Larger down payments may require offering the client an incentive, such as a discount on the contract price.
For example, you could offer:
1% discount for a 30% down payment.
2% discount for a 40% down payment.
3% discount for a 50% down payment.
Run a cash flow analysis to ensure that offering a discount for a larger down payment makes financial sense for both you and your client. In many cases, a 50% down payment with a 3% discount can save the client money while allowing you to avoid financing the project yourself.
Conclusion
In the world of contracting, positive cash flow is king. By negotiating down payments or early payments, you ensure that cash keeps coming in the door. And remember the three most important rules for any business:
Have cash.
Have cash.
Have cash.
Be creative and persistent in your negotiations, and always aim to keep the cash flowing in your favor.
