How to Manage Cash Flow in a US Construction Business
More US construction companies fail from cash flow problems than from lack of work. You can be winning jobs, doing good work, and still run out of money if payments don’t align with costs. Here’s how to fix the structure.
The Construction Cash Flow Problem
Construction has a fundamental mismatch: you pay workers weekly, material suppliers in 30 days, and clients pay you in 30-60 days (or later on commercial projects). Without management, this gap kills otherwise healthy businesses.
Fix 1: Deposits on Every Job
A 25-33% deposit before ordering materials means you’re never funding materials out of your own pocket. For a $10,000 job, a $2,500 deposit typically covers all material costs. Non-negotiable from day one.
Fix 2: Draw Schedules for Larger Projects
For jobs over $15,000, use a draw schedule tied to milestones:
| Milestone | Payment |
|---|---|
| Contract signed | 25% deposit |
| Foundation / rough-in complete | 25% |
| Substantial completion | 40% |
| Final punch list complete | 10% |
Never get more than one payment cycle behind – if the second payment hasn’t arrived, don’t start the third phase.
Fix 3: Business Line of Credit
A revolving business line of credit ($25,000-$150,000) serves as a buffer for timing mismatches. Draw when you need to cover payroll or materials; repay when client payments arrive. The interest cost is minimal for short-term use and far less than the cost of turning away work due to cash constraints.
Apply through your business bank after 12 months of operation and $200,000+ in revenue.
Fix 4: Invoice the Moment Work Is Complete
Every day between completing work and sending an invoice is delay you’ve chosen. Invoice via phone on the day of completion. Set your payment terms to “due on receipt” or “net 7” rather than “net 30” wherever possible.
FAQs
What is retainage and how does it affect cash flow? Retainage is a percentage (typically 5-10%) of each progress payment withheld by the owner until project completion. It’s standard in commercial construction and can significantly impact cash flow on long projects. Factor it into your working capital requirements.
How do I handle subcontractors when I’m waiting on client payment? Structure subcontractor payment terms to mirror your own – “pay when paid” clauses are legal in most US states and shift some timing risk to subs. However, many experienced subs won’t accept these terms. The best solution is adequate working capital so you don’t have to.
CoreQuote helps US contractors invoice immediately and manage payment terms. Try free at kwowta.com.
Related reading: