Why profitable contractors run out of cash
Profit is what you earn. Cash is what you have today. On your books, a job makes money the day the work is done. In your bank account, it makes money weeks later, after you have already paid for the labor, the lumber, and the sub who framed it.
The opening chart shows two contractors with the same work and the same $301k of profit. Contractor A still needs a $339k credit line to stay open. The only difference is how fast the money arrives. Contractors who look at the profit and loss statement alone cannot see this. Construction cash flow is a timing problem, and a profitable year does not fix it.
The math, with contractor A
| 1 | Days to cashUnbilled days + approval + terms + transfer | 15 + 10 + 30 + 5 =60 days |
|---|---|---|
| 2 | Days to payLabor share × crew days + other share × sub days | 35% × 7 + 65% × 21 =16.1 days |
| 3 | Days you fund the workDays to cash − days to pay | 60 − 16.1 =43.9 days |
Why growth makes the gap worse
Growth feels like the cure for a cash problem. For a slow-pay contractor, it is the cause. Each new month of work is bigger than the last, and you pay for it before the smaller, older months finish paying you. The bills are always for this month. The receipts are always from two months ago.
This is why a contractor can win the best year in company history and still miss payroll. Set monthly growth to 0% above and watch the low point rise, then set it to 8% and watch it fall. Check the number before you take on a bigger home, not after.
For GCs: faster pay wins better subs
Good subs have a choice of jobs, and they talk to each other. A trade that waits 60 days to get paid has to borrow money or raise prices to cover the wait. If you pay reliably, you give them a reason to answer your call first, show up when you need them, and sharpen their pencil on the next bid. The cost of slow pay does not disappear. It comes back to you in your bids and on your schedule.
There is a limit. Each day you shorten your own days to pay is a day of cash you give up, so change the pay-subs input for contractor B and watch the line. The strongest position is to get paid fast and pay fast together, so that the money moves through you and you do not fund the job.
Five levers that shorten days to cash
- Bill more often. Moving from monthly to biweekly billing removes about 8 days of unbilled work. It is the cheapest lever, and it needs no client negotiation if the contract allows it.
- Approve faster. Agree on who approves an invoice and by when. A clear invoice with receipts attached has fewer questions to answer.
- Get paid electronically. A check in the mail adds days of transfer time and a trip to the bank. ACH or a wire removes most of them.
- Lower or release retainage sooner. Ask for 5% in place of 10%, a reduction at 50% complete, or a release when your scope is done.
- Collect deposits or mobilization payments. Money at the start can turn the first month of a job from a cost into a cushion. Plan the billing with the construction payment schedule calculator.
What construction factoring costs compared with getting paid faster
Factoring sells your invoice to a lender for most of its face value now, and the factor keeps a fee. At an example fee of 3% for each 30 days, an invoice that pays in 60 days costs 6% of the invoice. At an 8% net margin, that takes three quarters of your profit on the job. Ask for the all-in cost, then compare it with the credit line interest above and with the levers that make the gap smaller. If the gap comes from thin pricing and not timing, check your numbers with the markup vs margin calculator.