Cash Flow Management for Contractors
Cash flow problems kill more construction businesses than lack of work. This guide covers the unique cash flow challenges contractors face and proven strategies to manage them.
82% of construction business failures are attributed to cash flow problems, not lack of profitability.
Source: CFMA Annual Financial Survey[1]
Why Contractor Cash Flow Is Different
Contractors face unique cash flow challenges that other businesses don't encounter:
- 1.Front-loaded costs — You pay for labor and materials before you get paid for the work.
- 2.Retainage — 5-10% of every invoice is held back until project completion, sometimes for months or years.[1]
- 3.Long payment cycles — Average days to payment in construction is 83 days, according to Levelset research.[4]
- 4.Seasonality — Many contractors see 60-70% of revenue in 6 months but fixed costs year-round.
Key Cash Flow Metrics to Track
The CFMA recommends contractors track these metrics weekly, not monthly:[1]
Cash Runway
Cash on hand ÷ monthly burn rate. Healthy contractors maintain 3-6 months runway.
Days Sales Outstanding
Average days to collect payment. Industry average is 45-60 days; top performers under 35.
Retainage Receivable
Total retainage outstanding. Should be tracked separately from regular AR.
Work in Progress (WIP)
Costs incurred vs. billings to date. Underbillings tie up cash; overbillings create liability.
Strategies to Improve Cash Flow
1. Bill More Frequently
If your contract allows, bill weekly instead of monthly. Even billing twice monthly can improve cash flow by 15-20 days. The SBA recommends negotiating billing frequency during contract negotiations, not after.[2]
2. Negotiate Better Payment Terms
Standard construction payment terms are Net 30, but many GCs extend to Net 45 or Net 60. According to AGC data, subcontractors who negotiate payment terms at bid time are paid an average of 12 days faster than those who accept standard terms.[3]
3. Manage Retainage Actively
Track retainage as a separate receivable and bill for retainage release immediately upon project completion. Many contractors leave retainage on the table simply because they don't have a system to track it.
4. Align Payables with Receivables
Negotiate supplier terms that match your collection timing. If you collect in 45 days, push for Net 45 with suppliers. Many suppliers offer 2% discounts for paying in 10 days — only take these if your cash position allows.[2]
5. Build a Cash Reserve
The CFMA recommends contractors maintain cash reserves equal to at least 10% of annual revenue. This buffer protects against slow pays and seasonal dips.[1]
Warning Signs of Cash Flow Problems
Watch for these early indicators:
- • DSO increasing over 3 consecutive months
- • Retainage receivable growing faster than revenue
- • Frequently delaying supplier payments
- • Using credit lines for operating expenses
- • Underbilling on WIP reports
Sources
Construction Financial Management Association. Annual Financial Survey of the Construction Industry.
U.S. Small Business Administration. Managing Your Business Finances.
Associated General Contractors of America. Construction Economics Research.
Levelset. Construction Payment Report - industry payment timing data.