Where the cash goes
| Cash drain | What it is | Typical size |
|---|---|---|
| Retainage receivable | Earned revenue the owner holds until completion | 5–10% of billings to date, for the life of the job |
| Under-billing | Work performed that has not yet been billed | Whatever the WIP schedule says; often a month of cost on fast jobs |
| Collection lag | Days between a pay application and the check | 30–60 days on private work, longer on public |
| Payroll before billing | Labor paid weekly, billed monthly | Up to six weeks of self-performed labor |
| Stored materials not yet billable | Materials bought ahead that the contract does not allow billing | Depends on the contract |
| Unapproved change order work | Work done on pending changes that cannot be billed yet | Grows quietly on troubled jobs |
The offsets are over-billing (cash collected ahead of work performed), retainage payable (cash held from subcontractors) and pay-when-paid terms that push subcontractor payment until the owner has paid. Together these mean a contractor’s working capital is largely a function of its billing position and its subcontract terms, which is why two contractors with the same margin can have opposite cash positions.
Over and under billing as working capital
The WIP schedule’s over/under billing columns are the single best cash indicator a contractor has. Over-billing is cash in hand for work still to be done; it is a liability on the balance sheet and a source of working capital until the work catches up. Under-billing is work done and unpaid; it is an asset that should be turned into a pay application as fast as the contract allows. A job that is persistently under-billed is lending money to the owner.
- Front-load the schedule of values where the contract allows, so early billings cover mobilization and early labor
- Bill stored materials where the contract permits, with the documentation the owner requires
- Bill every month on time; a missed application cycle is 30 days of float given away
- Treat under-billing on the WIP schedule as a to-do list for the next application, not just a reporting result
- Watch over-billing that is funding losses: cash collected ahead that will not be matched by profitable work later
Retainage and payment terms
Retainage held from you and retainage you hold from subcontractors roughly offset on a job with a high subcontracted share, and do not on self-performed work. Knowing the net retainage position by job, and when each release is expected, is the difference between a surprise and a plan. Pay-when-paid and pay-if-paid clauses in subcontracts shift the collection lag downstream; whether they are enforceable varies by state, and they do not change what you owe, only when.
- Track retainage receivable and payable by job with expected release dates
- Negotiate retainage step-downs at 50% completion where the owner will agree
- Time subcontractor payments to owner receipts where the subcontract allows, and tell subcontractors the schedule
- Pursue retainage release at substantial completion rather than waiting for final; the paperwork is the delay
A weekly cash view
A monthly cash flow statement is history. A useful cash view is forward-looking and built from open items: receivables by expected receipt date (not invoice date), payables by due date, payroll by pay date, retainage releases by expected date and the next billing cycle by job. It is updated weekly, takes an hour when the data is in one system, and tells you whether the line of credit is needed in week three.
- Start with bank balance and available credit
- Add receipts: open customer items by expected date, using the owner’s actual payment history rather than terms
- Add retainage releases expected in the window, with their paperwork status
- Subtract payables by due date, including subcontractor payments timed to owner receipts
- Subtract payroll and the costs that cannot wait: taxes, insurance, union benefits, equipment payments
- Add the next pay applications by job and their expected receipt dates
- Flag the first week the balance goes negative and decide now: accelerate a billing, delay a payable, or draw the line
How Forge ERP supports cash management
Forge keeps the inputs to a cash view in one ledger rather than across spreadsheets. Retainage receivable and payable are held in their own accounts and appear with bills, invoices, credits and deposits as open items. AIA pay applications and subcontractor applications track billed-to-date and certified-to-date per schedule-of-values line, and the WIP schedule’s over/under billing comes from the approved forecast and posted billings. The cash flow projection report lists open receivables and payables by vendor or customer and due-date bucket (overdue, 0–30, 31–60, 61–90, 90+) alongside the cash balance, and subcontractor payment eligibility is checked before release so cash is not paid out ahead of compliance.
Forge ERP covers projects, purchasing, accounts payable, billing and receivables, job cost and WIP, reporting and close. Payroll runs in your payroll provider and lands in Forge as job-costed labor with burden. Forge is in beta with a 14-day free trial.
Frequently asked
- Is over-billing a bad thing?
- Not by itself. Over-billing is cash collected ahead of work, which is working capital. It becomes a problem when it is funding a losing job, since the cash will not be replaced by profitable billings later, or when it is so large that the owner’s representative pushes back on the next application.
- How much working capital does a contractor need?
- Sureties commonly look at working capital as a percentage of annual revenue and at the ratio of current assets to current liabilities, with retainage receivable treated with suspicion. The practical answer is the trough in your weekly cash view plus a cushion for a late owner payment.
- Should I use my line of credit to pay subcontractors before the owner pays?
- That is what a line of credit is for, within reason. The decision is easier with a weekly cash view that shows when the owner’s payment is actually expected, based on their history, and whether the subcontract terms allow waiting.