In this video, I’m going to share with you the number one secret to protecting your project budget even when you have to take out a loan.
1. Types of loans you might get to fund your project
Other contracting companies
2. When to use outside funding
After the award
Otherwise, don’t need the loan
3. How to account for fees
To avoid fees taking away from bottom line profits
Account for fees during buyout phase of project
Here’s an example of the numbers during the buyout phase:
Loan for $10,000 to float project until receive first payment on the project.
Contractors you have bidding out the project work:
Cement company - bid $25,000
Electrical company - bid $37,000
Drywall company - bid $21,500
Your bid on the project for the same work:
Cement - $27,000
Electrical - $42,000
Drywall - $23,500
Your bid - $102,500
Contractors initial bid - $92,500
Difference / profit margin - $10,000
Profit - $10,000
Loan - $10,000
Difference / profit margin - $0
(You have no profit and no wiggle room)
Now it’s time to negotiate with your subcontractors and try to get their numbers down:
Cement guy down from $27,000 to $25,000 = $2,000 back to bottom line profits
Electrical guy down from $42,000 to $38,000 = $4,000 back to bottom line profits
Drywall guy down from $23,500 to $22,000 = $1,500 back to bottom line profits
So now you have a total of ($2,000 + $4,000 + $1,500) $7,500 back to your bottom line profits.
Now your new profit is contractors cost ($25,000 + $38,000 + $22,000) = $85,000. Your bid of $102,500 - $85,000 = your new profit margin $17,500.
After the loan you have a profit of $7,500:
$102,500 - $85,000 = 17,500 (your bid - contractor’s bid = profit)
$17,500 - $10,000 - $7,500 (profit - loan = new profit)
The buyout phase of a project can make all the difference in what your profit margin looks like whether you’ve taken out a loan or not.