So, rather than simply handing over a big cheque to the developer at the start of the project, the lender will release funds on the drip in tranches. The funding will be agreed, and then the contractor will start work. At a pre-agreed point, often at the end of the first month, the contractor will send you an invoice for their work to date. You will then contact your commercial lender, who will send a surveyor around to inspect the site. Assuming the surveyor reports that the value of the work completed and materials stored on site reflects the contractor’s invoice value, then the lender will release the funds to you, allowing you in turn to pay the contractor. This tranche payment process continues until the end of the project.
You might think this is a little unfair on the contractor; after all, they could be significantly out of pocket by the time they get paid. However, contractors pay their employees and subcontractors in arrears, plus they will have trade accounts with their materials suppliers, usually with 30-day terms. This enables them to swan into Jewsons, pick up whatever materials they need and add it to the bill. Jewsons will then send them a monthly invoice. As a result, your contractor isn’t offering you a line of credit since they aren’t parting with any cash themselves until further down the line.
Most of your other professionals will send you an invoice for their work with varying payment terms. Some will want paying immediately, while others may offer 14 or 30-day terms. And as the developer, it’s your job to ensure these people get paid. However, I’ve discovered during my forty-odd years in construction that most developers like to operate what they might refer to as a ‘maximum cashflow’ model. Or, if you happen to be one of their suppliers, you’d be more likely to call it a ‘minimum payment’ model. In other words, the developer only pays the supplier right at the end of their payment terms, in many cases triggering a raft of payment reminders and phone calls, generating more work for the supplier. Believe it or not, there’s even a particular group of developers who operate an ‘extract the urine’ model, where they won’t pay a bean until their suppliers have exhausted every means possible of recovering the debt short of court orders or physical intimidation. These developers enjoy unparalleled credit terms in the industry but tend to struggle to find suppliers for their next project for some unfathomable reason.
So, let me offer you a word of advice. When it comes to paying people, you should be the one that pays early. Of course, you should wait for the invoice to arrive. But rather than sitting on it for a few weeks revelling in that slight yet ephemeral ‘having your cake and eat it’ feeling that comes with legitimately extant debt, you should instead get your bills paid as soon as they land. Why should you do this? The main reason is that the goodwill you’ll generate from your suppliers will far outstrip the marginal cashflow benefit or loss of interest that you will receive by clinging onto their money until the last possible moment. It’s true, you do lose a little benefit financially in paying early, but it really is small beer. Instead, I heartily recommend viewing early payment as an insurance policy. Firstly, you’ll become famous in various Accounts Payable teams around your immediate vicinity for your prompt and unprompted payment. You’ll set yourself apart from your laggard competitors who drag their feet, pay late, and need to get nagged and chased.