Construction Working Capital: Never Run Out Mid-Project
- Cost Construction Accounting
- 3 days ago
- 4 min read
Your largest project is humming along. Crews are on schedule. The client is happy. Margins still look fine on paper. Then payroll week arrives, and your CFO delivers the news: there isn’t enough cash to cover next week.
This situation is far more common in construction than most contractors admit. Projects don’t stop because companies are unprofitable. They stop because cash arrives too late to cover expenses that must be paid now.
Many construction firms fail with full backlogs because they can’t bridge the gap between paying payroll, suppliers, and subcontractors today and collecting from clients weeks or months later. This article explains how working capital management prevents that outcome.
What Working Capital Means in Construction
Working capital is simple math with serious consequences.
Working Capital = Current Assets − Current Liabilities |
In construction, current assets typically include cash, progress billings, retainage, approved or pending change orders, and materials already purchased. Liabilities include subcontractors, suppliers, payroll taxes, short-term debt, and the current portion of long-term loans.
What matters most is the working capital ratio:
1.5 or higher generally indicates stability
1.2–1.4 suggests vulnerability
Below 1.2 signals imminent cash stress
This is why contractors can appear profitable on financial statements and still struggle to make payroll. The problem isn’t margin, it’s timing.
Why Construction Cash Flow Breaks So Easily
Construction cash flow is fragile by design.
Projects often run 6–24 months, tying up capital while expenses hit daily. Clients routinely withhold 5–10% retainage, sometimes for months after all related costs have been paid.
At the same time, contractors operate in a pay-first environment. Payroll runs weekly. Suppliers expect payment in 30 days. Insurance, equipment, and overhead don’t wait while owners often pay in 45–90 days.
Material price volatility adds further pressure. Lumber, steel, and concrete can spike 15–30% mid-project, quickly eroding both margin and cash if increases aren’t captured through change orders.
The Metrics That Signal Cash Trouble
Cash problems rarely appear without warning. They usually show up in a few key numbers.
Working capital ratio shows whether short-term assets can cover short-term obligations.
Days Sales Outstanding (DSO) reveals how long it actually takes to collect payment; anything consistently above 60 days is a concern.
Days Payable Outstanding (DPO) reflects how long vendors are carrying you.
The cash conversion cycle shows how long cash is trapped inside active projects.
When these metrics drift in the wrong direction, cash stress typically follows within weeks, not months.
Why Construction Companies Run Out of Cash
Most cash failures are predictable.
Internally, underbidding leaves little room for delays or disputes. Cost overruns quietly drain reserves when labor takes longer than estimated or material waste goes unchecked. Slow invoicing especially monthly billing widens the cash gap even further. Overextension is another common issue, when contractors take on more projects than their working capital can realistically support.
Externally, late-paying owners, disputed change orders, supply chain disruptions, and sudden material price spikes compound the pressure. While these factors may be outside a contractor’s control, their impact is not unpredictable.
Early warning signs usually appear well before a crisis: rising DSO, routine use of credit for payroll, or stretching vendor payments beyond agreed terms.
Seven Strategies to Prevent Mid-Project Cash Shortages
1. Forecast Cash Weekly, Not Monthly
Monthly cash reviews are reactive. Weekly forecasting is preventative.
A 13-week rolling cash forecast, updated weekly, provides visibility far enough in advance to act. Contractors who can see six to eight weeks ahead still have options accelerating billing, delaying spending, or arranging financing calmly.
2. Improve Billing Speed and Consistency
Billing speed directly affects cash speed.
Contractors who tighten billing typically:
Bill progress weekly instead of monthly
Submit invoices within 24 hours
Bill change orders immediately rather than waiting for approval
Even small improvements here can reduce DSO by weeks and free significant working capital.
3. Manage Payables Strategically
Accelerating receivables only works if payables are managed intentionally.
Effective contractors:
Negotiate Net 45–60 terms where possible
Align subcontractor payments with owner payments
Communicate early when timing shifts
Strong relationships create flexibility. Silence destroys it.
4. Control Costs Before They Compound
You can’t collect your way out of overspending.
Weekly reviews of budget versus actual costs help surface problems early, when they’re still fixable. Labor overruns, material waste, or undocumented scope changes almost always become larger cash drains if ignored.
5. Secure Financing Before You Need It
Banks lend to companies that don’t urgently need money.
Lines of credit sized at 20–30% of annual revenue, equipment financing instead of cash purchases, and selective use of receivables factoring all provide breathing room when timing gaps appear. Financing should bridge timing not hide losses.
6. Use Technology to Stay Ahead
Manual cash management keeps companies reactive.
Construction-specific accounting systems improve billing speed, forecasting accuracy, and job-cost visibility. Many contractors report 20–30% improvements in working capital within the first year of implementation.
7. Build Cash Reserves Intentionally
The strongest protection against cash shortages is having cash.
Maintaining three to six months of operating expenses allows contractors to absorb payment delays, disputes, or downturns without halting work. Reserves are built deliberately by retaining profits and including contingency in bids.
Success Story: GC Cuts DSO by 40%
Company: Commercial GC | $15M Revenue | 45 Employees.
The Problem: DSO averaged 75 days, causing constant payroll panic and heavy reliance on high-interest credit lines.
The CCA Solution:
Implemented a 13-week rolling forecast.
Switched to weekly progress billing.
Automated AR payment reminders.
The Results (6 Months Later):
DSO dropped to 45 days.
Freed up $180,000 in working capital.
Avoided an $80K projected shortfall identified 8 weeks in advance.
Paid off the line of credit and eliminated interest expenses.
The Bottom Line
In construction, positive cash flow isn’t about having the most revenue, it’s about timing. You can have a strong backlog and healthy margins and still fail if you can’t bridge the 90-day gap between expenses and collections.
How CCA Can Help
At Construction Cost Accounting (CCA), we help contractors move from "reactive" to "proactive." We specialize in helping contractors establish cash flow forecasting, optimize billing processes, and implement financial controls that prevent mid-project cash shortages.
Don’t let cash be the reason a good project fails.
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