Prior to Dryrun,I was knee-deep in service work for years. The risky nature of large contracts for small business was one of the things that led me to build dryrun. Often large contracts don't look that risky when you land them. That's the tricky part.

I found out the hard way that big contracts can cause a lot of problems and, at times, could bring a company down. As the contracts we dealt with got larger and larger, I found some simple but useful ways to mitigate the risk when big jobs walk through the door.

The Two Big Problems Small Business Can Face When They Get Big Contracts

Early on, landing larger contracts seemed almost too good to be true. I'd do a little basic math in my head and tell myself, "we're solid for six months with this contract." In bottom-line, monthly budget terms, that may be true but I soon found a couple of ways that things could unravel and have a major impact on business.

Problem 1 - No Clear Terms Outlining Deliverables and Payment

Failing to define clear terms and deliverables prior to signing the contract can be one of the riskiest moves a small business can make. I know the drill. The money looks great and the job looks doable. Simple. Let's not rock the boat. We just need the contract signed!

When payments (thus cash flow) are tied to unclear deliverables a business can find themselves in a situation where scope creep can rear its ugly head. Your client may be well-meaning but constantly changes the deliverables based on input from others, a growing understanding of business goals or simply the inability to make a decision. You are now at their mercy.

With nothing in the contract to clearly define deliverables you might just knuckle under, completing every change as quickly as possible to try and reach that deliverable and the waiting cash. Timelines extend, work increases at a frantic rate and cash flow dwindles.

That six month contract just turned into a ten month haul with numerous cash flow crunches and a year-end well into the red. That is, if you have a cushion of cash or overdraft. It could also mean the end of the line.

One more important factor to understand. Clearly defined deliverables and a solid schedule are also key on your client's side of the project. Even if they stick to the original plan and an increase is scope is a avoided, delays in delivering materials, meetings with key stake holders, sign-offs etc. can all have a catastrophic affect on a small business.

If you have nothing else scheduled from other clients, your staff could be sitting on their hands waiting to continue work on the project and your cash flow gets stretched out further and further. Quickly selling other work can be a dangerous game as well. When projects get delayed (no matter who is at fault) clients invariably want to speed up deliverables once the project is moving again

Problem 2 - Cash Comes in Much Faster Than The Job Can Be Completed

You can run into the polar opposite problem when tying payments to a schedule rather than deliverables. I had this happen on a contract where the client wanted to pay the majority of the contract on a monthly schedule with a final payment upon completion.

This format seemed like a great idea at the beginning. The client didn't have to deal with a complicated check-list of detailed deliverables, invoicing was straight forward and we weren't at the mercy of minor issues holding up payment.

The problem comes when the project gets delayed. We had cleared much of our schedule for months to accomplish the project within the planned timelines (which matched up with the monthly payment schedule) so little other work was in sitting in the wings. We just didn't have the capacity to handle more work and manage the big contract at the same time.

Inevitably, the project was delayed numerous times for a litany of issues, all out of our control. The cash kept coming in but we were handling little other work and their were many idle hours in the shop.

The crunch comes at the end of the payment schedule. Just around the time you need to be working on new projects, all of the backed up work rolls in. The client is pushing for completion since the project is behind. The fact that they caused the delay has no bearing on the pressure they excert.

Now you're faced with a situation where you have months of work ahead with only a small final payment coming. Six months of payments already paid out but three more months of work to complete the project. Six months of revenue for nine months work.

Four Ways to Help Avoid the Crunch

1. Frequent Small Payments and Flexible Sign-off

Even if the client complains about the extra administration, insist on more frequent smaller payments for well-defined deliverables. Try to keep the definition of each deliverable flexible.

For instance, tie payment to 90% completion of a deliverable for mid-project phases, which gives room for negotiation when things on the client side delay the project and it allows for deliverables to be moved to other points in the schedule.

It benefits both you and the client to remain flexible in sign-off and payment of a deliverable to keep the project moving and the contractor on solid footing.

2. Longer Schedule and Diversified Work

Try to schedule the big project on a longer timeline to allow other work to flow in and it of the office. It can be tempting to try and rush a big project through with all hands on deck but your risk is dramatically increased.

If the schedule can't be lengthened right from the beginning, try to line up other work on a much later or very flexible delivery date. This can be a tricky task but its much easier ahead of time then last minute when projects are delayed and staff are idle.

Offering a slight discount on this fill-in work can help you keep it flexible. These other, small projects can fill in down time when things are delayed or fill in schedules once the big project is it of the way.

3. Delay Payments When Necessary

If payments are on a timeline rather than based on deliverables, try to delay payments until an appropriate amount of work has been completed. Although this can seem counterintuitive, it's in your best interest. When the client is the reason for delays, you can seek other work to help ease the pain while avoiding the pressure a client will exert to complete work they've, in their mind, already paid for.

4. Know Where You Stand and Explore Different Scenarios

It is absolutely critical to forecast your cash flow and update your assumptions every week at the minimum. Understanding the state of your cash flow and your assumptions several months out will help you to react to issues early.

Understanding your cash flow will give you the opportunity to open up communication with the client about the issues you face early on along with a workable plan that favours everyone. You may be able to adjust staff needs, put off larger purchases or bring in other work well ahead of time.

Finally, in a worst case scenario, you can contact and deal with bank early. They will be much more open to working with on a loan or credit a month or two out rather than a desperate plea for immediate cash.

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