Progress payment claims in the housing industry are managed differently to those in the commercial sector in the vast majority. There are still some very large multi-million dollar residences built using the commercial approach of claiming monthly and on a ‘% complete’ basis but by and large the housing sector uses a ‘stage payment’ process for progress claims.
Over the years, the ‘accepted’ practice is for the contract payments to be broken into five main stages -slab/base; frame; enclosed; fixing and practical completion (PC).
These five stages make it easy for the home buyer and any lending institution to establish that the stage has been completed by the builder and can authorise the payment to be made. In the commercial sector, there is an added cost by requiring an independent professional such as an architect or quantity surveyor to assess the work completed and approve the claim made by the builder. The cost to home buyers and the delays in construction would become prohibitive in the housing sector and hence the ‘stage payment’ method is used primarily.
Different States will have varied legislation however it is common that the claim for each ‘stage’ cannot be made until the applicable works are ‘substantially’ completed.
Whether you issue a tax invoice for the claim at the same time as the claim or wait until the payment is made is dependent on how your business operates its accounting and the submission of GST payments.
If your business is using some project management software to schedule the tasks on each job then you should be able to forecast ahead to see what progress claims and their value are due in the coming months, say at least six months so that you can prepare a cashflow forecast. This forecast should be updated weekly but at the least fortnightly to identify the effects any delays will have on the profitability of the business each month. Every months’ delay deducts the overheads for that month off the bottom line which you will have difficulty recovering.
Management of the progress claims becomes a joint effort with the construction team, the finance team and the administration team responsible for the jobs. That could be simply the business owner and his wife who does the accounts right up to large teams represented by managers of those functions.
Again, depending on how you do your accounting – accrual vs cash will depend on how you account for the claims made and paid. If it is ‘accrual’ then the value of the claims will be the total of those claims issued in the month. If it is ‘cash’ accounting then it will the value of the claims received in the month.
Either way, you need to have a process in place that reconciles the claims made against the claims received. The business owner should also receive a reconciliation of the claims made, received and banked to ensure all the funds are credited to the business.
Separately to this process of managing the progress claims, there should also be a process for ensuring only ‘approved’ contractors and suppliers are engaged by the business and only the ‘approved’ contractors and suppliers are setup in the accounting system for payment. This can be done by having a process in place to confirm and approve any new contractors/suppliers for the business. This list should be available to the business owner at regular intervals so that a scan of the bank statements can be done randomly or at regular intervals.
In addition to this, a process for creating approved extras on jobs will help ensure bogus invoices and payments are not made against jobs thereby skimming off the profits of a business without any accountability and transparency.
The 3C Mentor Builders’ Business Resource website has forms for checking a new contractor as well as a process for extra costs (ETSs) to help builders implement these systems into their business.
The whole purpose of The 3C Mentor and Alpha Edge is to help create really great businesses in the residential building industry and delivered by our unique ‘Four Pillars to Your Success’ – Business Coaching, Business Consulting, Business Resources and Construction Software.
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