BUYOUT MEANING IN CONSTRUCTION.
In construction, buyout means turning the estimate into signed commitments. After award, a general contractor awards subcontracts and orders material, and a subcontractor orders its material, books its equipment and hires its own vendors. Each commitment is compared to the number in the estimate. When a commitment costs less than the estimate, the difference is buyout savings, sometimes called buyout gain. When it costs more, the difference is a buyout loss. Both are known before the work is built, which makes buyout the first point where the job's margin can be measured.
Buyout is the first time the estimate meets real prices. The estimate says what the job should cost, and the buyout says what it will cost. This page defines the term and shows the cash effect. How to manage the buyout window for material is in the material buyout strategy guide.
WHAT IT MEANS.
Buyout is the stage after a contract is awarded when the contractor commits the cost of the job by signing the subcontracts and placing the purchase orders for material and equipment.
The word buyout has a second meaning in construction: one owner buying out a partner. That is a different subject, covered on the partner buyout page, and it is not what this page describes.
WHAT BUYOUT COVERS.
What gets bought out
Everything the estimate priced that the company does not do itself. For a general contractor that is the subcontracts, the material it buys directly, the equipment rentals, the permits and the bonds. For a subcontractor it is the material package, the equipment, any lower-tier subcontractors and the specialty vendors. Each item becomes a signed subcontract or a purchase order.
The buyout log
The buyout log is a list of every cost code with three numbers beside it: the budget from the estimate, the committed cost from the signed subcontract or purchase order, and the difference. A code with no commitment is open. The log shows how much of the job's cost is fixed and how much can still change, and it is updated every week until every code is committed.
Buyout savings and buyout loss
A material package estimated at $400,000 and bought at $372,000 is $28,000 of savings, 7 percent of the package. The same package bought at $424,000 is a $24,000 loss. Savings improve the margin and losses reduce it, and both exist before a single unit is installed. Savings should not be spent in the job budget until the commitment is signed, because a quote that is not signed can change.
What buyout does to cash
A commitment creates a payment date. A deposit may be due when the purchase order is placed, a supplier may require payment on delivery, and a supplier on net 30 terms expects payment about 30 days after the invoice. The contractor bills for that material only when it is installed or, if the contract allows, when it is stored. Buyout therefore moves cash out earlier than cash comes in, and the difference is the contractor's own money.
Quote dates and price changes
A quote holds its price only for the period written on it. Material that is not bought inside that period is priced again at the market. On a fixed-price contract an increase belongs to the contractor. For that reason the buyout log lists the quote expiration date beside every open code.
WHAT IT LOOKS LIKE IN DOLLARS.
Estimate $400,000. Bought at $372,000. Savings $28,000, which is 7 percent of the package. On a $1.5M contract that is 1.9 percent of revenue, or 19 percent of a 10 percent margin.
The material is delivered on day 40 and the $372,000 invoice is paid on day 70, net 30. The material is installed and billed on the pay apps submitted on days 90 and 120. Using the 56 day average wait for payment, the first dollars come back around day 146 and the last around day 176. That is 76 to 106 days after the supplier was paid. At 10 percent a year, the interest on $372,000 for that time is about $7,700 to $10,800.
Cast-in-place concrete material, cost code 03 30 00. Budget $400,000. Committed $372,000. Difference plus $28,000. Quote expires day 21. Status: purchase order signed.
WHAT WE CHANGE.
SPM sets up the buyout log from the estimate's cost codes the week a job is awarded, so every code has a budget, an owner and a quote date before the first purchase order is placed.
When a commitment is signed, the committed amount goes into the job cost system, so the cost report shows committed cost beside actual cost. A job that is over its buyout is visible before the invoices are posted.
Supplier terms are negotiated against the job's pay terms, with the first delivery matched to the first pay app that can bill it. Where the contract allows, stored material is billed so the material is paid for inside the normal pay cycle.
One person signs commitments and the log is the only place that records them. A purchase order placed in the field and not entered in the log is cost the job report cannot see.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing. No payroll. The one-time onboarding fee is right here in the table.
| Last 12 months revenue | Monthly fee | One-time onboarding |
|---|---|---|
| Up to $1M | $1,900 to $2,900 | $1,000 |
| $1M to $3.5M | $2,600 to $3,900 | $1,500 |
| $3.5M to $6.5M | $3,800 to $5,700 | $3,000 |
| $6.5M to $9.5M | $5,100 to $7,100 | $4,500 |
| $9.5M to $12.5M | $6,100 to $8,500 | $6,000 |
| $12.5M to $15.5M | $7,400 to $11,000 | $7,500 |
| $15.5M to $18.5M | $9,400 to $13,500 | $9,000 |
| $18.5M+ | Quoted individually | Quoted individually |
The onboarding fee covers migrating your books back to the start of your last taxable year and getting you fully operational in 60 days. It's billed once, with your first invoice. It's the same for all three tiers. Your first month is prorated, and your monthly engagement starts on the first of the first full month.
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items. The onboarding fee is right here in the table.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions and never in a report.
Your bookkeeper still does the books.
You stop touching the books.
Everything in Core, and we do the bookkeeping and the controllership as well. Your office stops answering coding questions and stops fixing a reconciliation that will not balance on the last day of the month.
We do the books. No payroll.
Every job shows its margin while it is still open.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the books, the job costing, and the software. No payroll.
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