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From Residential to Commercial, Part 2

The financial requirements for a commercial drywall business are greatly different from the residential drywall business. Not only do you get to be the contractor, you also get to be the banker! You didn’t misread the previous sentence; I said, You get to be the banker!

In other words, the owner and the general contractor are using your money to fund the job. You become the banker (so to speak) because you are usually waiting so long to be paid for the work you have completed.

Here’s the scenario. Let’s say you start a job on the first of the month. Your first activity to begin this project will probably be to purchase materials for the job. Following the material purchase you will then assign a crew of workers to the job. When the 25th of the month rolls around, it is time to submit your pay request. At this point you have materials on the job, and the payment for those materials will be due by the first of the coming month. Your crew has now been on the job for three weeks. You submit your pay request for the materials you have purchased and for the labor and withholding taxes you have paid, tack on your overhead and profit and you wait … . If you are fortunate, your payment might arrive 30 to 45 days later—minus the 10 percent retainage of course.

Depending on the duration of the job, your income for the job will always be less—much less than what you have spent. And the 10 percent retainage-—you won’t see that money for 90 to 180 days after your final invoice. By now you should fully understand the previous comment about you becoming the banker.

Realize that this painfully slow return of your money is the norm and not the exception here. With this in mind you are going to need sufficient operating capital to keep you going while you are waiting to be paid. I suggest that you have a bare minimum of cash available that is no less than 15 percent of your anticipated annual sales volume. You also should have a line of credit established at your bank to supplement your working capital.

A payment and performance bond is not something you would ever be required to provide in the residential business. However, if you’re in the commercial business you will probably be required to provide a surety bond on jobs over a certain size. The ability to bond a project is something you have to earn over a period of time. It takes a minimum of two profitable years in the business and a strong financial statement for a surety to agree to bond a portion of your work. You (and your spouse) will be required to sign indemnity agreements for the surety. In other words, you have to pledge your assets to the surety in case they have to pay a claim against your company—you have to pay the surety back.

On the operations side of the business you will need equipment for the commercial business that you didn’t need for your residential business. To get started you will need gang boxes, lasers, scaffolds, ladders, chop-saws, cords, screw-guns, shot-guns and some miscellaneous hand tools.

Management of your commercial business will definitely require more of your time. You are responsible for more activities and a direct coordination with other subcontractors, which could have a serious impact on your productivity. The more time that can be dedicated to overseeing the project, the better chance you have for a profitable job.

The commercial GCss usually require weekly scheduling meetings. These meetings last for hours. So, depending on how many projects you have at any one time, you could find yourself stretched pretty thin. You might be in the market for a project manager to assist you sooner than you think.

I believe I have touched on most of the important differences between the residential and commercial drywall business. The rest is up to you. So if you’re feeling froggy, make the jump!

About the Author

Charles Mahaffey is president of Accuest, LLC, Marietta, Ga. Accuest provides estimating and consulting services for commercial drywall subcontractors.

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