Commercial Work Versus Residential Work

Here's another good thread on the pitfalls of commercial cabinetmaking work. May 28, 2010

We have been considering a venture into commercial work but have been sternly warned by many that unless we are very well positioned (financially), we could be eaten alive. I have heard many stories about waiting months for money as well as being held out for numerous other trades to finish. Stories about your money being strung out for close to a year. Any input would be appreciated. I had always been under the impression that commercial work would be a little more cut and dry than residential, with a bit less nitpicking.

Forum Responses
(Cabinetmaking Forum)
From contributor R:
I have done several commercial jobs over the last 2 years. The money can be a problem. Fortunately I was able to get a deposit. I think most generals on commercial jobs do not do this. The monthly billing can put you 2 months behind on your money. The last draw is usually the problem. That would be retention and change orders. I finished my last commercial job in October and am still waiting for the last billing to be paid. Three to 4 months is about standard. I have some friends strung out for 6 months easy. And if the contractor is a crook, you don't get your last bill paid till you lien the job.

From contributor M:
Commercial work is generally more cut and dried, at least in the sense that it tends to be professionally designed and blueprinted, and you don't usually have to worry about some finicky owner going over your work at the end and emotionally deciding if they like it or not.

But the downside of commercial work is that you don't get paid COD at the end of the job like residential, and neither do you get deposits and advances on your contract. You are generally working for a general contractor whom you have to trust will pay you after the job is done, and yes, this typically takes a month or more. Other than that, your lien rights are your only legal recourse on denial of payment.

There is such a thing as doing commercial work directly for businesses (no general contractor), and this type of commercial work is often done COD, but not always, since big companies are not usually set up to pay at completion, but rather after they have submitted your bill through normal company payment channels.

From contributor J:

The pros and cons of commercial work have been correctly identified. The scope of work is generally very clear and the emotional response of the homeowner is eliminated (although when that response is good it can be very rewarding). However, I have done work where it took 6 months to get my final payment and I had to lien the property. If you are going to get into this area, get to know your state's lien laws very well. Also, sign a retainer agreement with a construction lawyer (this is very cheap) for legal advice. In CA you must file a preliminary notice or you are up the proverbial creek. All in all, just make sure you are well educated and you will be just fine.

From contributor M:
You may want to enter only a small percentage of your work into the commercial arena. We do some of both, but the residential is more predictable for us. We finish, we get paid. I have two jobs sitting in my shop that the contractors demanded be ready for installation earlier this week. If my luck holds, I will start installing one tomorrow and the other next week, maybe. A lot of it all boils down to who you will be working for. Like homeowners, the people in charge of commercial projects can be great to work with, or not. If you ask around and talk to other subs, you can get a good idea of who to work for. Also, the people who have been around for years are a better bet - they know they have to pay, eventually. The other posters know what they are talking about. If you do it, know what you are getting into with each contract and be prepared to go the next mile to get your money.

From the original questioner:
I am going to refresh myself on the lien laws. I am nervous about the long terms with regards to payment, though at the right time it wouldn't hurt me too bad. Of course I am sure the first one will come when I don't have 3-4 months of buffer in my receivables.

I don't really have a lot of complaints about the residential work as I actually enjoy the customer interaction, but I have literally never had a pain-in-the-butt fussy customer and never been held out for money or changes/tweaks. I was thinking the commercial work might move our business to the next level.

From contributor N:
The above is all good advice. We do mostly commercial and some high end residential. Once you get rolling and a few months in, the cheques will still come in the mail every month, just not for jobs completed in that month. When we do large jobs you are allowed a draw, which covers goods installed. Also keep in mind there is typically a 10% hold back.

You will also have to have the ability to do shop drawings for submittal to the architect before starting. This only happens once in awhile since we have a good reputation, but they do take time.

From contributor E:
I build both types of cabinets, commercial and low to high residential. The best way I can explain the differences is emotion. In the mid to high, made-to-order/custom residential, you're dealing with people who are going to care about every detail. They want the experience to be filled with all that goes into their project. Will the cabinets match the 100 year old chest their father made? Are they going to be able to fit the 1000 spice jars? Can you have it done by a special date just before the big wedding?

In commercial it's just another product or service with no room for emotion. The generals don't care about the type of machinery you use or how you worked in your father's shop for every summer of your life. They want a product that is going to be built as the supplied drawings stated and with the materials that were called out. If you're lucky you get an architect who knows what they are doing and supplies you with good drawings. They want it to fit and that's about it. No thinking just cabinets.

That's how I equate it. Emotion = Money

As per getting paid, your company sets the terms. Your bid/estimate will state your terms - COD, net 30, net 60. Set your price for the terms they want. If they want longer terms then add it to the bill for playing the bank. If your job is to just deliver your cabinets to the site, then start the billing, have the vendor sign receipt and start the clock. You should have signed documents from your clients stating what terms you have agreed on. If you have to lien, lien the job on the first day after delivery. It's your right as a contractor. I use one contract packet that has the lien notice in the packet and the date when it will be filed, which is 2 days after the stated delivery date. Remember there's no emotion in any of this.

I realize that people are saying, well, I won't get the work if I press back on anything - time, money, delivery, terms. Just think of it like all of the other parts to the puzzle in a commercial project. Best price will almost always win. Be strong in all of your dealings with the client, and they will be fair in return.

From contributor B:
There are people with way more knowledge about commercial work than I, as we don't do much. But there is one warning I have for you. Watch out for penalties for late completion. A company that I used to work for went under because a commercial job was late and there was a per day cash penalty in the contract. The worst part is it wasn't our fault. We started three weeks late due to other trades being slow, and were supposed to be the only ones in the building for a two week period in order to get all of our cabinetry in. This didn't happen, and we needed to work around other trades, which slowed the process further. So perhaps someone here has a contract amendment they could share with you to protect yourself on this particular issue.

From contributor H:
Ditto on the late fees. Even if they don't have late charges, they get real nasty if you miss delivery. You may also have to up your insurance if you do any delivery, installation or work on site. On site may require a union employee.

From contributor L:
Almost all of our work is commercial and I agree with almost all of the above. Be very careful which GC's you bid to. Don't do any changes without having a signed change order in hand. As part of the change order, have the delivery date affect included. The retainage will typically be held until well after the entire job is complete. For draws on larger jobs there will be a date that all billing must be submitted for any hope of payment during the next payment cycle so you can be out nearly 2 months for that. Lien laws vary greatly by state. If you end up with a lien, that can drag out payment, and can cost a lot via lawyers and court costs - very expensive! Liens also really only affect some owners. Some are exempt (government work). If the GC goes belly up during the job, you may eventually get paid, at least partly. Given all of the above, don't take on larger commercial jobs than you can easily finance! Or stand the possible losses. If an owner goes belly up during construction, you may end up with nothing, even with your lien! We lost $38K, 100% of what was still owed, on a job that we had a valid lien on.