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
- Factoring 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.