Cash Flow for General Contractors and Construction

The construction cash trap

A typical commercial GC project runs 6-18 months. The owner pays per AIA G702 pay applications, but withholds 5-10% retainage until project completion and lien release. Materials suppliers want net 30. Subcontractors expect payment 30 days after the GC gets paid (which is 30-60 days after pay application submission).

Net effect: a GC running \$5M of active jobs typically needs \$500K-\$1M of working capital just to bridge the timing. Retainage alone can tie up 5-10% of contract value for 6-12 months past substantial completion.

Levers specific to construction

Pay-when-paid clauses (passing the GC's collection risk to subs) and pay-if-paid clauses (passing default risk too) are standard in construction contracts. State laws vary on enforceability — California limits pay-if-paid; New York largely enforces it. These clauses materially shape cash-flow risk.

Mechanic's liens are the GC's enforcement tool against non-paying owners. Filed promptly (state-specific deadlines, often 60-90 days from last work), they create a cloud on title that usually triggers payment. Many GCs with cash trouble simply weren't aggressive enough with lien rights.

Working capital in a project business

Construction working capital is dominated by receivables and retainage. A general contractor with $20M in annual revenue typically carries $4-6M of receivables (60-90 days) and another $1-2M of retainage that won't release until well after substantial completion. The combined working-capital footprint can be a quarter of annual revenue — a much higher ratio than service businesses without retainage.

Bonding capacity is the binding constraint for many growing contractors. Surety bonds are sized to working capital and net worth — typical capacity is 10-20x net working capital — which means cash discipline directly limits what jobs you can bid. Improving working capital by collecting retainage faster or paying subs on a strict pay-when-paid basis directly increases the size of jobs you can pursue.

Job-level cost-to-complete tracking is a non-negotiable discipline. The classic construction failure mode is positive overall financials masking a single underwater project; by the time the cost overrun is recognized, the cash to complete is no longer available. Weekly cost-to-complete reviews on every active project, with explicit hold-back on profit recognition until job costs are confirmed, are the textbook control.

Surety bond calls are the financial event most likely to end a contractor. A single bonded job that goes seriously over budget can trigger the surety to step in, complete the work at the contractor's cost, and pursue the indemnity agreement against the contractor's other assets. Tight job-cost discipline and conservative bid pricing are the only real defenses.