PROFITABLE BUT SHORT ON CASH? WHERE CONSTRUCTION CASH HIDES

Most contractors this size run on a monthly P&L. Cash doesn't run monthly. Payroll hits weekly. Vendor terms run net 15 to net 60. Draws show up three to four weeks after you bill. Retainage releases when the owner feels like releasing it.

A monthly P&L tells you what happened last month. It can't tell you whether payroll clears the second Friday of next month.

The fix is a 13-week rolling cash forecast: every expected dollar in and out, by week, updated every week. It's the first thing we build in a new engagement. One $38M specialty contractor caught a payroll-week squeeze eight weeks out in his first week running it. Three jobs were mobilizing before the first draw on any of them. He moved one billing cycle up and pushed one vendor payment within terms. That was $180K of breathing room, with no line of credit draw. How to build a 13-week cash flow forecast.

Every contractor has an AR aging report. The bookkeeper emails it. The owner glances at it. Same names every month. Then nothing happens.

That's cash you already earned, sitting in someone else's account. A $20M to $25M commercial services contractor we worked with had exactly this. We walked the aging line by line and asked one question on every balance over 60 days: who owns collecting this? The answer was usually nobody. Inside one quarter of weekly collection calls, just under $190K moved back into the bank.

Most contractors we meet run DSO, or days from invoice to cash, between 55 and 80 days. On a $25M company, cutting that by 8 to 15 days frees $500K to $1M.

Retainage is 5 to 10 percent of every progress payment, held until the job is done. It's earned the day you bill it and collectible whenever the owner gets around to it. Most contractors accept that as a fact of life. That's why it traps so much cash.

One $25M commercial contractor had roughly $700K sitting in retention across three jobs. None of it was on a forecast. Nobody was chasing it. We gave each balance an expected release date, a contact, and an owner on his team. Two of the three released within 90 days, because someone finally asked.

Owners describe this three ways. "We're doing work we haven't billed." That's underbilling: you're financing the customer's job. "We billed ahead and now the cash is gone." That's overbilling: the work is still ahead and the money was already spent. "I can't tell which jobs are funding the company." That's the WIP blind spot.

All three come from the same gap: a WIP schedule that isn't kept honest, read, or acted on. A $25M to $30M heavy civil contractor we worked with installed a monthly WIP review with operations, estimating, and finance in the same room. The first three meetings surfaced two underbilled jobs worth six figures each, and one overbilled job whose cash had been hiding the squeeze everywhere else. How to read a WIP schedule.

Volume 1 covered the margin side of change orders. This is the cash side. Even signed change orders fail to turn into money in four common ways:

• Approved, but the schedule of values never got updated, so it never got billed
• Stuck in dispute for 90, 120, 180 days
• Priced fairly but billed at the back of the job, so you carry the cost for months
• Done on a handshake, with paperwork that never caught up

A single missed billing on an approved change order typically runs $30K to $80K, and it often repeats across several jobs at once. More on change orders and profit fade.

Most contractors inherited their supplier terms. Somebody set them up years ago, usually at net 30, and nobody has asked since.

The math is simple. A contractor spending $400K a month with suppliers at net 30 carries that $400K himself for 30 days. At net 60, the supplier carries it. That's $400K of cash freed without a new customer or a single change in the field. On a $30M contractor, moving the top three to five suppliers to net 45 or 60 typically frees $300K to $700K for good.

Add a rule that PMs get three prices on any material order above a set amount, and contractors typically save 4 to 6 percent on material.

This is the part almost nobody reviews on a schedule. We boil it down to three rules.

• Finance more equipment than your gut says to. Pay $400K cash for a loader in March and you may be drawing $400K on the line by May. Keep the cash for mobilization and payroll.
• Watch which way your line of credit moves. A healthy line gets drawn during the gap and paid back when the customer pays. If your balance is higher than it was a year ago and revenue hasn't grown to match, the line is funding losses. Find them.
• Know how your bank and surety read your numbers. The bank wants to know your cash covers your debt payments. The surety wants to know your working capital fits your backlog. Walk in with a clean package and you negotiate. Walk in without one and you take what they give you.

One commercial contractor's line of credit hadn't been reviewed in five years. We built the package with the owner: 24 months of cleaned-up financials, the 13-week forecast, a backlog summary, and a growth plan. The bank moved the line from $2M to $6M, and the surety raised the single-project limit at renewal. How to increase bonding capacity.