Construction is a very complex procedure, and it has taken me years and years to fully realize how all the parts are interconnected. One of the toughest aspects of the work is managing the budget, and the monthly invoicing.
No matter how many times I discuss the process, from how the costs are tracked to how to understand the monthly invoice I send to my clients, the final cost of the project is always a shock to clients.
It is easy to look back and see common trends. At first, the initial check they write to me is often the biggest check they’ve ever written. I hear that comment quite a bit. On bigger projects, the early invoices tend to be smaller amounts, so they are easy to digest. But the totals get bigger as the job continues, and there are always one or two massive ones that are likely to surprise some clients.
But to tell the truth I don’t think they ever really look at the invoices in detail when they get them, and that is a real problem.
Every contractor has a slightly different way of working, but construction pricing is extremely complex. Typically, costs are tracked by “divisions” that are specific to the industry. For example, in a simple vanity in a bathroom, the cabinet is division 6, but the drawer pulls are division 10, the counter tops are division 4, and the sink and faucet are division 15. So a client never sees all of these costs at the same time in the same place.
There is a lot of trust involved, but trust is not enough. If you really want to know where your money is going, the single best investment you can make is to hire a construction attorney or accountant to review the monthly invoices for you. Sure, the contractor can explain the details for free, but there is no substitute for an objective observer.
When I used to work for a big builder and had monthly invoices upwards of $500,000 a month, I used to have to meet once a month for 4-5 hours at a time to go over the invoices with the clients’ auditors. I would sit down with an MBA and a lawyer across the table from me and we would go over every single item. Most of the time everything was fine, and I was always proud of myself for passing this kind of test once a month. But the fact that this developer would hire an attorney to review the draws once a month always stuck with me.
At the end of a project it is too late to go all the way back to the beginning to try to explain all the details. It’s possible, but it is incredibly time consuming as there are usually several large binders full of information. And it is also too late to change course to save money, because the work is already complete. It’s a disappointment for both parties when the information is not understood and digested by the client on a monthly basis.
1. Draw Request
Definitely hire a construction lawyer or accountant to help you review the monthly invoice (also known as a Draw Request) if you are in any way uncertain. I know lawyers are expensive but after one or two reviews it should not take long. With a competent contractor, a monthly review of the draw request should take an hour or less, and if there are any questions they can usually be handled by email. Request a digital copy of all invoices from subcontractors in that Draw Request, and look for any hand-written notes on them. A good contractor will usually write a quick explanation of the more confusing invoices from subs.
Don’t worry about your contractor not feeling trusted-it’s actually a relief to talk about the numbers without all of the emotional attachment to money that is usually involved with a client.
2. Review Costs of Additional Work
Make sure that when you ask your contractor to do additional work that you also ask if it was included in the original estimate, or if the request will be a Change Order, which means it will add cost to the overall price of the work.
Most reputable contractors are sticklers for details, so their books are organized so they can retrieve information as quickly as possible. There are a lot of numbers to keep track of, and in our company we use an open-book method of cost tracking, so the client can always see the details at any time. But this only applies to a cost-plus type of agreement.
3. Consider Subcontractors
A lien waiver is an important document to be aware of. Each time a sub-contractor is paid, they should sign a release of their right lien your property due to non-payment. Typically, the lien waivers for a January invoice will be returned in time for the February invoice, so they tend to run about a month behind in terms of bookkeeping schedules. Lien waivers are not required for all expenses, just for sub-contractors that perform work on site over the course of the project.
4. Pay Invoices On Time
It is wise to pay your monthly invoice on time, even if you have a few questions. This will keep the wheels turning on your project, and if your builder decides you deserve a credit or refund, they can make the adjustment on the next invoice. Entering invoices and tracking subs and materials is a very cumbersome process, so it’s a lot easier to issue a credit in the next invoice than to go back and adjust the current invoice. Sometimes it takes a full week of work by several people to put together a monthly Draw Request.
To summarize, good bookkeeping has nothing to do with trust. Trust is a human emotion that can be fleeting. The single best thing you can do for your own piece of mind is to have your contractor answer to a lawyer or accountant from the very start of the project. This way the rules of engagement are established up front and at the end of the project there are no surprises. I have come to find out that those surprises, while not my fault, are very expensive for both sides to resolve after the work is complete.