EP 17 - Improving your cash flow with MOS payments
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Cash flow is challenging for any business, but construction is notorious for late payment and underhand arbitrary deductions.
If you’re looking to grow your business, you’ll inevitably have to work with new clients who you have no previous trading experience with – so you’ll naturally worry about cash flow.
Here are my tips on how to mitigate your cash flow risk and agree to more favourable payment terms with a new client.
Transcription
Today, we’re going to look at ways subcontractors can minimise their cash flow risk - particularly when working with a new client.
We all know cash flow in the industry is a challenge, and subcontractors bare the brunt and most risk of becoming insolvent due to multiple clients and multiple liabilities. Also, it can be tricky getting credit terms with suppliers; especially when you first start trading.
So how can a subcontractor who’s supplying labour and materials mitigate their cash flow risk and proceed with a new client with certainty?
You may think a deposit is a simple way to solve this issue, but you will probably immediately get shot down. Deposits are challenging to obtain in the industry for many reasons. So unless your works consist of large bespoke off-site items, such as windows and kitchens, and the installation only represents a small amount of the overall value, it will be highly unlikely that you’ll agree on a deposit.
So what else is there?
Not all subcontractors know this, but there is a mechanism in construction contracts for material onsite payments - sometimes called (MOS).
An MOS payment differs from a deposit, where the client will certify the materials delivered to site that are not yet part of the works, and they then process this within the monthly valuation. The client will also likely get an MOS certification from their end client or funder, so no one loses out.
So there are no surprises, you should agree to an MOS certification with your client before entering into a contract. So, be open with your client and say,
“we’ve not worked together before, and I’m cautious about cash flow; please can we agree to an MOS payment and certification during our works, and I will bring the materials to site in bulk, so you have them? I have broken down what they will be each month”.
MOS payments are a simple way to give both sides comfort, and when I was QS’ing, this is something I used to agree with subcontractors who were cash sensitive to provide them with cash certainty, and it would help strengthen the relationship.
So, if you’re a subcontractor or a QS looking to place an order with a subcontractor who’s feeling the pinch - discuss MOS payments to help each other out.