Knowing (and Avoiding) the S-Curve

What if I told you that Cash Flow was the root of your project problems?

 

As a General Contractor for almost 15 years, I consider myself an ardent student of cash flow.  When I was younger and working on massive hotel projects, cash flow was essential to keep the project going.  When I switched focus and started remodeling and flipping houses, I was able to view my cashflow in greater isolation as we had far more but smaller projects.  What I found was amazing—and I want to share it with you so you don’t make the same mistakes I have seen time and time again.

What I learned was that the costs of a project behave much differently than what you would expect. Specifically, they follow an S-curve, while the funding has an opposite trajectory.  This may seem counter-intuitive, but I pulled hard spend data from 13 different residential remodels to test this theory, and all of them showed a similar data once I plotted my spend as the GC, and the customer’s revenue to me.  Let’s take a look at what we found:

With the red line reflecting the construction spend, and the green representing revenue from the client, I wanted to point out three separate areas you should be aware of:

The area before the gray arrow is what I call the Fat Cash Belly of the job. This is where the costs are well below the revenue of the job. This area typically encompasses the initial startup, demolition, framing, and starting the MEP rough-ins.

 

The gray arrow indicates the Flip Point: This is where two things flip:

  • This is where the project revenue and spend invert as the costs on the project exceed the revenue given.  
     

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  • This is also the start of the War between Contractor and Owner. You see, the contractor knows something is wrong but cannot put his/her finger on it. They simply feel like they are spending more and more, and intuitively know they likely have spent more than they have been given, but without isolated and daily up-to-date cost tracking, it is hard to tell for sure. But at this point in the project, the suspicion is growing, and the demeanor of the project will certainly change. The contractor will start to push back and become easily irritated over simple and easy requests—especially ones that will cost additional money, or take more time.

 

The area to the right of the gray arrow is The Push, where the costs now exceed the revenue. Then the Owner, seeing the end in sight, will delay further payments until more and more progress is complete.  

 

  • A brief insight on Owner behavior:  This is typically where many Owners run out of money because they didn’t budget the real value of the project or thought they could get it done cheaper, and now has to find additional funds from another source, like a second project.  However, telling that to the contractor is generally not done, for fear it will weaken their position, or the GC might walk off the job. So the cover story is usually that the Owner demands more work before additional funds are dispersed).
     

When the project “flips” and becomes upside-down for the contractor, where do you think he/she gets the money to finish the job? Situations like this are likely where the phrase “robbing Peter to pay Paul” originated.  It would of course be ideal if the contractor had a large operating budget from which to pull those additional funds, but that isn’t reality for most contractors.  So at this point, contractors too will often take on an additional job (or two), and take the fat-belly deposit at the beginning of these other jobs to cover the finishing financial needs for the original project.  

Only the first job might never get fully repaid. This leads to a cycle of deposit stealing to cover upside-down projects until the company finally closes their doors, and leaves the very last projects without a seat as the music stops.

Preventing the S-Curve

Knowing the nature of construction funding and spending, and the habits of both investors and contractors, we at the Flip Factory App wanted to do something about it.  We wanted everyone involved in flipping a house to enjoy the process by reducing risk and ensuring both accountability and timely payments. In our app we programmed the flow of funds a better way:

  1. Funds within the app can only be used for the designated project and cannot be commingled.

  2. Scopes are distributed directly to Subcontractors upon invoice approval, thus eliminating the need for GC deposits.

  3. With ensured funding, scopes never experience “the Flip,” and the ensuing “war” never takes place between GC and Owner.  Both parties remain amicable as they proceed calmy and progressively toward a successful completion of the project.

 

You can learn more about the Flip Factory App and its programmable cashflow at FlipFactoryApp.com.

Jake Harris

Flip Factory App Co-Founder & CEO