Cash Flow or Cash Trap? Mastering Retainage and Payables for Subcontractor Survival
- Cost Construction Accounting
- 3 hours ago
- 6 min read
Many successful subcontractors face a serious cash flow crisis, not because their projects are unprofitable, but because they can’t manage the timing gap between when they need to pay bills and when they get paid. This issue becomes especially critical when working with general contractors (GCs) who hold back retainage (a percentage of payments) for months, further complicating the situation.
Take the example of a successful electrical contractor, he had profitable projects and healthy margins, but his bank balance was nearly empty. Supplier invoices were overdue, payroll was approaching, and his general contractor was holding retainage. Despite being profitable, his company was on the brink of bankruptcy due to the timing mismatch between accounts payable (AP) and accounts receivable (AR).
The Core Problem: AP/AR Timing Mismatch
Subcontractors face a brutal cash flow cycle:
You pay immediately:
Materials: Net 30 days from delivery
Labor: Weekly or bi-weekly
Equipment: Due on return
Taxes: Quarterly (IRS doesn’t wait)
You get paid later:
Submit pay app: End of billing period
GC review: One to two weeks
Payment processing: 30-45 days after approval
Minus retainage: Withheld for months
Real Example: The Texas Electrical Contractor
A small electrical contractor in Texas faced this exact issue. After securing three profitable commercial projects, he spent heavily on materials and labor in the first month, but his bank account dropped. Despite submitting invoices for payment, he didn’t receive anything right away. By the time the first payment arrived, a large portion was withheld as retainage, and suppliers began demanding cash on delivery for future materials.
The contractor had earned money but couldn’t access it because of the retained funds, which led him to experience cash flow trouble despite being profitable on paper.
How Retainage Becomes a Hidden AP Problem
Retainage, often viewed as an AR issue (money owed but not yet collected), is actually a significant AP problem because it locks up working capital you need for current bills. When you invoice for a project, you typically only receive 90% of it, with the remaining 10% held as retainage. Even though you’ve already paid suppliers, this withheld amount ties up your cash flow for months.
This causes a vendor damage cycle:
Month 1: Pay on time → Vendor happy
Month 2: Pay slightly late → Vendor concerned
Month 3: Pay very late → Vendor calling daily
Month 4: Can't pay vendors → Lose net-30 terms
Month 5: Vendors demand COD → Can’t buy materials
Month 6: Can’t bid on new work → Spiral begins
Multiply this cycle across multiple projects, and retainage could tie up tens of thousands of dollars in working capital, further exacerbating the cash flow crisis.
Warning Signs You’re in an AP Crisis
Recognizing the early warning signs is crucial to prevent a full-blown crisis:
Critical Danger: Using one project’s revenue to pay another project’s bills, relying on credit cards for operating expenses, or having multiple vendors threatening legal action.
Severe Warning: Frequently checking your bank balance with anxiety, missing early-pay discounts, and vendors requiring payment before delivery.
System Failure: Inability to quickly produce AP aging reports, not knowing the total amount owed, and lacking the ability to forecast payment needs.
If you’re seeing these signs, you’re in crisis mode. But don’t panic there are steps you can take to regain control.
Immediate Strategies to Escape the Cash Flow Trap
Strategy 1: Strategic Payment Prioritization (Immediate Action)
When cash is insufficient, prioritizing payments becomes key to maintaining operations and relationships. Here’s how to prioritize:
Priority Tier 1 – Never Miss:
Payroll and taxes (personal liability)
Insurance premiums (lapse = illegal to operate)
Bonding payments (loss of bond means you can’t bid on work)
Priority Tier 2 – Protect Actively:
Materials for active projects
Critical equipment rentals
Key subcontractors or trades
Priority Tier 3 – Manage Carefully:
Suppliers for completed jobs
Non-critical equipment rentals
Secondary vendors or service providers
Priority Tier 4 – Delay if Necessary:
Discretionary overhead (office supplies, upgrades)
Owner distributions
Real Example: The Plumbing Contractor’s Turnaround
A plumbing contractor faced a severe cash crunch but used the prioritization system to pay payroll and taxes first, then contacted his top suppliers to negotiate extensions based on when GC payments would arrive. Proactive communication and honesty helped him maintain strong relationships with vendors.
Strategy 2: Rolling Cash Flow Forecast (Short-Term Fix)
A rolling cash flow forecast is one of the most powerful tools for preventing cash flow crises. It helps you anticipate cash gaps before they become critical.
Real Example: The Concrete Company’s Prevention
A concrete contractor’s simple 3-month cash flow forecast revealed a significant shortfall in eight weeks due to large material purchases coinciding with delayed GC payments. With time to act, he accelerated payments from GCs, negotiated extended terms with suppliers, and activated a line of credit, avoiding the shortfall.
How to Create a Simple Cash Flow Forecast:
Cash In (weekly): GC payments, retainage releases, change order payments
Cash Out (weekly): Payroll, vendor invoices, equipment rentals, insurance, taxes
Strategy 3: Negotiating Payment Terms (Preventative Measures)
When you’re not in crisis mode, negotiate better payment terms with suppliers and GCs. The time to ask for extended terms or reduced retainage is when you’re financially stable, not when you’re desperate.
With Suppliers: Ask for extended payment terms (e.g., net-45 or net-60) or negotiate discounts for early payment.
With GCs: Request reduced retainage (e.g., from 10% to 5%) or faster payment terms (e.g., 15 days instead of 30).
Long-Term Solutions for Better Cash Flow Management
Improve Billing Practices: Bill more frequently to reduce the time between completion and payment. For example, switch from monthly to bi-weekly billing.
Increase Project Profitability: Regularly review project pricing and eliminate consistently unprofitable types of work.
Systematic Retainage Collection: Track retainage closely and follow up to ensure timely release.
Diversify Your Client Base: Don’t rely on just one or two GCs. Diversifying helps spread the risk and gives you more options if one GC slows payments.
Industry Trends Affecting Cash Flow
Extended Payment Cycles: Many GCs are holding payments longer due to economic uncertainty. Assume 45-60 day payment cycles.
Material Cost Volatility: Price fluctuations in materials can stress cash flow, so build contingencies into your bids.
Labor Shortages: Skilled labor shortages are driving up costs and affecting productivity. Adjust your bids to reflect current labor realities.
Increased Bonding Costs: Poor cash flow management can harm your bonding capacity, which limits your ability to bid on work.
Emergency Actions: Already in Crisis
List all AP exposure: Know exactly what you owe, and prioritize payments.
Calculate available cash: Understand how much cash you have and when it will arrive.
Call vendors immediately: Reach out proactively to negotiate payment dates.
Accelerate collections: Push for early payments from GCs and seek retainage releases.
Real Example: Electrical Contractor's Crisis Mode
One contractor was days away from missing payroll but managed to avoid disaster by spending four hours on the phone. He negotiated early payments with his GCs and extensions with his suppliers, and he used a credit card to cover the shortfall temporarily.
Conclusion: Your Path Forward
The accounts payable crisis is a real issue for subcontractors, but it’s solvable. Contractors who thrive aren’t necessarily the ones with the biggest projects, they’re the ones who master cash flow management.
If you implement the strategies outlined in this article like prioritizing payments, forecasting cash flow, and negotiating better terms, you can avoid the cash flow trap and ensure the long-term stability of your business.
Ready to Escape the Cash Flow Trap?
Construction Cost Accounting specializes in accounts payable management and cash flow forecasting exclusively for subcontractors. We understand your unique timing challenges because we only work with construction companies.
Schedule a free 30-minute cash flow assessment where we'll analyze your current accounts payable situation, identify immediate risks in the next 90 days, show you exactly where cash is leaking, and provide a custom action plan specific to your business.
Call us today or visit our website to schedule your assessment. Our current clients consistently tell us that our cash flow forecasting has saved them from at least three major crises in their first year with us.
