Construction cash flow management: A guide to optimizing payments and profits

Managing cash flow is challenging in the construction industry because income streams and expenses are unpredictable, while costs are often fixed. Ensuring those outflows are covered by your cash inflows is where the challenge lies. This comprehensive guide breaks down different strategies used to manage construction cash flow.

These concepts are universal, whether you’re a general contractor managing multiple projects or a specialized subcontractor trying to optimize your operations. The bottom line in construction is to maintain a level of liquidity that allows you to handle setbacks or take advantage of growth opportunities when they come along. This guide can help you do that.

What is construction cash flow management?

Cash flow management is the organization, execution, and optimization of cash inflows and outflows. It’s fairly straightforward when you have predictable revenue and fixed costs. Unpredictable revenue and variable expenses complicate it. Revenue for a construction company is usually unpredictable, so cash flow management is more difficult.

Fixed costs in construction include rent or lease payments on the office, insurance premiums, salaries for permanent staff, depreciation, property taxes, interest expenses, licenses, permits, and equipment leases. Note that this does not include salaries for workers or materials costs. Those only come into play when the company is working on a project.

Imagine that your company, ABC Construction, is paying a total fixed overhead of $100,000 per month. Your average income per construction job is $500,000, minus the costs of labor and materials. If a project is bid properly, you build in a 10% to 20% margin after those costs are covered—that’s $50,000 to $100,000 per project. So, you need 1–2 projects a month to cover your fixed costs.

In most cases, ABC Construction won’t get paid the entire $500,000 upfront. Any down payment you receive will need to cover materials and labor until the next payment comes in, all while continuing to pay your fixed costs. This is a common example of a construction cash flow projection. To illustrate it further, take a look at the income and expense examples below:

Common construction company income streams include:

• Progress payments from clients based on completed work
• Milestone payments tied to specific project phases
• Final payments upon project completion
• Retainage releases (typically 5-10% held until final approval)
• Equipment rental income
• Change order payments for additional work

Typical construction expenses include:

• Labor costs (wages, benefits, payroll taxes)
• Material purchases and supplies
• Subcontractor payments
• Equipment costs (purchase, rental, maintenance, fuel)
• Insurance premiums
• Overhead expenses (office rent, utilities, administrative costs)
• Loan payments and interest
• Taxes and regulatory fees

The timing of income and expenses is a key variable in a cash flow forecast. For example, if the project cycle is 90 days and your terms are 50% up front and 50% upon completion, the down payment must cover all your expenses until the final payment. Many companies apply for a construction line of credit to stay solvent during these revenue gaps.

See how a Bluevine Line of Credit could help you cover gaps while you’re waiting to be paid.

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The construction cash flow cycle

The first step in managing the construction cash flow cycle is to set up an income and expense calendar. You can find this feature in most project management software platforms. It’s critical to track all inflows and outflows so you can get accurate revenue and expense numbers on each construction project. The cash flow cycle should look something like the seven steps below.

1. Bidding and estimating

This is the first phase of the cash flow cycle because you’ll be investing time and resources into researching projects, estimating costs, and preparing bids. You will not receive any incoming revenue during this phase, but your fixed costs will remain constant. See our article on construction financing for tips on how to manage expenses during this period.

2. Project award and contract signing

The project award is the point where all your hard work pays off, and it’s where the cash flow cycle gets interesting. An award is usually accompanied by a down payment to buy materials and labor. You’ll also need to schedule subcontractors and obtain permits. Itemize each of these expenses and add them to your project management calendar.

3. Project mobilization and initial expenses

This is one of the more expensive stages in the cash flow cycle. It’s where you purchase materials, mobilize equipment, set up temporary facilities, and start accumulating labor costs. These substantial upfront investments usually happen weeks or months before your next progress payment arrives, creating potential construction cash flow problems.

4. Work in progress and progress billing

As the work progresses, your accounts payable department will prepare invoices based on the progress you’ve made on the project. The milestones for those payments should be predetermined in the construction agreement. For example, a homebuilder might require a payment after the foundation is poured, then another when the house is framed.

5. Client payments and collections

Payment terms should also be included in the initial construction agreement. With private clients, invoices are generally due upon the completion of the project milestone. Government contracts work differently because they pay on their cycle, not yours. This should be built into your construction forecasting. You’ll also want to leave room for late payments.

6. Subcontractor and supplier payments

They get paid when you get paid. Unfortunately, subcontractors might not go back to work if payments are late. Established construction firms understand that client payment cycles don’t necessarily match up with subcontractor payments due. It’s essential to pay contractors and workers on time. The challenge is maintaining positive cash flow while doing it.

7. Project closeout and retainage release

The final payment is sometimes the hardest to collect. It could come weeks or months after the project is complete. Warranty releases and retainage collections also take time, so significant capital will be tied up for a while before all obligations are satisfied. Meanwhile, your fixed costs are still there. You’ll need to manage funds carefully to stay solvent.

Common construction cash flow challenges

Construction companies face unique cash flow challenges that can impact financial stability. These are mainly due to the disparities between payouts and payments received. Understanding these challenges can help you develop proactive cash flow management strategies to offset them. First, let’s review potential causes:

• Slow client payments and extended payment terms: Offering 60-day or 90-day terms on a job that will be completed in 30 days is not a formula for success in any industry. In construction, that payment gap will force you to seek alternative financing to cover salaries and fixed expenses. That can get expensive if you do it too often.
• Unexpected project delays (weather, permitting, inspections): Construction projects are vulnerable to bad weather, permitting delays, and surprise inspections. Work stoppages for any of these reasons can set you back financially and delay progress payments your company needs to pay labor and materials costs.
• Cost overruns due to material price spikes or unforeseen issues: This is a scenario that we’ve become all too familiar with. Market volatility can cause materials and supply prices to rise or fall. Unforeseen site conditions, like contaminated soil or utility conflicts, can trigger expensive change orders that may not be approved or paid for months.
• Inefficient change order processes leading to payment delays: The customer is always right, and sometimes they change their minds. Those change orders create additional work, constrict cash flow, and could delay progress payments for weeks or months. If not documented properly, they could even result in legal action.
• High retainage percentages and lengthy release periods: Retainers are funds withheld until the completion of the project. That could apply to what the client owes your company or payments you owe to subcontractors. Either way, lengthy retainage release periods could cause construction cash flow problems for all parties involved.
• Seasonal fluctuations impacting work volume: Construction companies in colder climates often shut down for several months during winter. Some are diversified enough to do inside work, but others lay off workers and cease operations. Unfortunately, there are still fixed costs to cover. It requires careful financial planning to execute this.
• Lack of access to immediate working capital: Banks and credit unions offer construction loans, but they may not be available to smaller companies with limited assets. You may be able to explore other types of financing, like equipment loans, but the amounts may not cover day-to-day working capital requirements.
• Poor initial bidding and inaccurate forecasting: Underestimating the costs of materials and labor is a far too common occurrence in the construction industry. Pricing construction projects requires extensive knowledge and experience. If you don’t have it, hire someone who does, so you can avoid construction cash flow problems.

How to calculate construction cash flow projections

Construction cash flow projection is a financial roadmap to help you calculate liquidity at various stages of a construction project. It’s one of the most important tools for cash flow management because it can help you make informed decisions about new projects, equipment purchases, and financing needs. This section outlines the steps in the process.

1. Determine your projection period

Established construction companies typically do cash flow forecasting on a monthly cycle, but it can be done weekly if you need more granular control over your spending. Quarterly projections work for companies that have longer project cycles and more predictable cash flow. Select the cycle that works best for you before moving to the next step.

2. Establish your beginning cash balance

Every financial process needs a starting balance. You can calculate yours by adding all the cash available in each of your business accounts. That includes business checking accounts, savings accounts, and other liquid assets. Don’t include accounts receivable or investments that haven’t been liquidated yet. Those can be captured as inflows later in the process.

3. Estimate all expected cash inflows

It’s important to use realistic numbers when you calculate cash inflows. Project what you can expect in your revenue pipeline and what you already have set up as recurring income. Be conservative. It’s better to underestimate because overestimating will cause cash flow problems. Here’s a brief list of the types of inflows you’re looking for:

• Client payments: Construction companies rely on client payments as their primary source of revenue. The trick to listing them here is to include only expected progress payments based on the terms of their invoices. You’ll also want to account for payment delays you’ve experienced with specific customers in the past.
• Retainage releases: Project cash flow from retainage based on when it’s due to be released. Track project completion status, warranty periods, and any outstanding items that might delay release. Construction cash flow projections need to be accurate and realistic, so don’t add anything that isn’t guaranteed or extremely likely to come in.
• Other income: Examples of other income include equipment rental income from idle machinery, asset sales you’re planning, or loan disbursements from approved financing. Don’t include speculative income from projects you haven’t yet won or payments that depend on uncertain future events.

4. Estimate all expected cash flow outflows

Once your inflows are done, start calculating your projected cash outflows. This requires a detailed understanding of fixed costs, variable costs, and your payment obligations. Previous income and expense statements can help you with this. You’re looking for:

• Labor costs: Wages, benefits, and payroll taxes for your direct employees. Include overtime projections and any planned salary increases. Factor in seasonal variations in labor needs and potential hiring plans.
• Material purchases: Costs for all raw materials and supplies needed for current and upcoming project phases. Consider market price volatility and potential bulk purchase opportunities. Include delivery timing and payment terms with suppliers.
• Subcontractor payments: Payments due to all contracted service providers based on their work completion schedules and payment terms. Track each subcontractor’s billing cycle and payment requirements separately.
• Indirect Costs/Overhead: Include regular operating expenses that continue regardless of project activity. Examples of this include rent, utilities, administrative salaries, insurance premiums, fuel costs, and loan repayments on existing debt.
• Contingencies: Always budget a buffer in case you encounter unexpected costs, whether from material price increases, weather delays, change orders, or site conditions. Industry best practice is to set aside 5% to 15% as a reserve.

Pro Tip

Plan for slight delays when estimating inflows and account for potential overruns when estimating outflows. This way, you can minimize the risk of a sudden cash shortfall and be better prepared to manage your working capital effectively.

5. Calculate your net cash flow for the period

Calculating net cash flow is simple. Add your projected cash inflows to your beginning cash balance, then subtract your total expected cash outflows. The ending cash balance will also be your beginning cash balance for the next report. You can track these rolling calculations over time to see how your cash position evolves.

This calculation is particularly important for identifying periods when you’ll need additional financing. For example, if you show a pattern of low cash flow during winter months, you may need a construction business loan to improve liquidity. Another option is a business line of credit that can be drawn on as needed to cover fixed operational costs and payroll.

Beginning cash balance
+ Total expected cash inflows
– Total expected cash outflows
= Ending Cash Balance

6. Choose the right tools

The right tools make the job easier, but only if you know how to use them. There are several applications and platforms you can use for construction cash flow forecasting:

• Spreadsheets (Excel, Google Sheets): Both Microsoft and Google offer low-cost or free spreadsheet applications that can be customized to meet your specific needs. You can use them to create sophisticated models with multiple scenarios.
• Construction accounting software: Industry-specific software for construction companies can help you with job costing, project management, payroll, billing, and invoicing. It can also run custom reports and cash flow projections.
• Specialized cash flow management tools: Companies like NetSuite and Rabbet have cash management tools that are ideal for the construction industry. These applications centralize your cost data to simplify cash flow forecasting.

7. Refine and update regularly

Construction cash flow forecasting is not a one-and-done exercise. For best results, refine your calculations regularly by inputting new numbers. Update your projections weekly or bi-weekly with actual results, revising future periods based on new information. Compare projected versus actual results to identify patterns and improve future forecasting accuracy.

Pro Tip

Consider best-case, worst-case, and most-likely scenarios to fully understand potential risks and opportunities. By looking at your finances through these different lenses, you’ll clearly see where money might get tight (risks) and when you might have extra cash (opportunities). This prepares you to handle tough times and seize chances to grow your business.

Key strategies to improve construction cash flow

Effective cash flow strategies are proactive, not reactive. That means you take appropriate steps today to ensure optimal cash flow tomorrow. There are several ways to do this, some of which we’ve already mentioned. Here’s a more detailed list of actions you can take to ensure cash inflows are always sufficient to cover cash outflows:

Accurately bid and estimate costs

Accurately estimating the costs and timelines for construction projects is what helps the good construction companies keep running. Underestimating creates construction cash flow problems and jeopardizes the financial stability of the company. Every dollar you miss in your initial estimate becomes a dollar that must come from working capital or reduced profits.

To do this properly, you’ll need a detailed analysis of the project, a realistic assessment of current market conditions, and an evaluation of your team’s capabilities. You’ll also want to include contingency plans to cover any work stoppages that could slow the project down. Accuracy is essential. Resist the temptation to reduce your bid just to win work.

Pro Tip

Look back at your past jobs. Use what you learned from their actual costs and timelines to craft your current bid. Consider using a simple project management software to help you spot trends and plan for unexpected costs.

Optimize invoicing and payment terms

Your payment terms directly affect your cash flow efficiency. It’s important to optimize your invoices properly and set up clear payment terms and conditions for your clients. Those are crucial for maintaining positive client relationships. For instance, shortening your payment terms makes cash flow faster, but it could create cash flow problems for your client.

Another step in setting terms is to evaluate how your competitors are doing it. Negotiate payment terms that meet your cash flow needs while keeping you competitive. You can also offer discounts for early payment and/or penalties for late payments. Ensure your contracts specify payment schedules, milestone definitions, and invoice approval processes.

Pro Tip

Try to negotiate shorter payment terms (like 15 days instead of 30) with your best clients. Always be crystal clear in your contracts about when you’ll bill, what those bills cover, and what happens if payments are late. Getting cash in faster means you have more money available for operations, and clear contract terms prevent misunderstandings that can cause payment delays.

Bill progress efficiently

Delayed invoicing can cause cash flow problems for you and the payee. It’s important to recognize and initiate the payment process as quickly as possible. Billing delays give your clients free, no-interest financing that will strain your cash position. Watch the progress of your construction projects carefully to prevent that from happening.

This is an area where having the right construction software can make life easier for you. Establish systematic billing processes that automatically trigger an invoice when certain milestones are reached. For this to work, you’ll need your people in the field to accurately document their daily progress in your project management software.

Pro Tip

Use digital tools or apps to automate your billing and invoicing process. This means bills go out instantly as soon as you hit a milestone, and you can easily track their approval status, cutting down on manual delays.

Proactively oversee accounts receivable

Invoicing is only one part of creating positive cash flow. The money owed isn’t truly “cash” until it’s in your bank account. That doesn’t happen until your clients pay you. This is another area where you need to be proactive. Implement a systematic follow-up process and maintain regular communication with clients about payment status.

Many construction companies develop aging reports to show when payments are due and when they come in. You can use the progress milestones we spoke about earlier to create the timelines for these reports. They’re also good for detecting patterns, like clients who consistently pay late or those who pay early to take advantage of discounts.

Pro Tip

Use your invoicing platform to set up automatic reminders for overdue invoices, and also implement a human element—maybe a quick call at three, seven, and 14 days past due. Be polite, but firm, and make sure your clients know you expect to be paid on time.

Strategically manage accounts payable

This is the other half of the equation. Your accounts payable should be in sync with accounts receivable. That means paying bills on time and ensuring there’s enough cash flow to cover your expenses. If you’re having trouble doing that, negotiate the payment terms or tap into another source of financing to get back on track.

Suppliers and contractors sometimes offer discounts for paying an invoice in full by a certain date. Take advantage of those opportunities. You can also organize your payments by order of the most critical to the least. Bills for critical operations, like utilities and rent, should come first. Suppliers also fall into that category if you want operations to run smoothly.

Pro Tip

Use the full payment period your suppliers give you (e.g., pay on day 29 of a 30-day term) to keep cash in your account longer. Just make sure you never miss a payment to avoid damaging those important relationships.

Streamline retainage collection

Funds withheld until the completion of a construction project can tie up significant capital for extended periods. It’s necessary to actively manage these retainages because they’re part of your construction cash flow forecast. The larger the projects, the larger the retainages. Always keep that up front when bidding on a project.

Warranty obligations and punch list items could delay the release of retainage funds. Maintain detailed records of these and check them periodically throughout the project. You’ll also want to proactively communicate with clients about project closeouts so they can start the process of retainage release on their side. Negotiate reduced retainage percentages if you can.

Pro Tip

Make sure your contracts clearly state your retainage terms. Keep a close eye on when project phases are finished, then immediately ask for your retainage back as soon as you’re allowed. Don’t be afraid to follow up repeatedly.

Control project costs and prevent overruns

Construction can be a lucrative industry if you control your costs and prevent overruns. Every dollar saved translates to more cash available for your business. Budgeting is the first part of that equation. Vigilant oversight comes next. Look for opportunities where you can cut costs without sacrificing the quality of the work or the reputation of your company.

Real-time expense tracking can alert you to potential construction cash flow problems before they occur, if you match that up with your progress and payment milestones. What you’re looking for is actual costs versus budgeted costs, materials cost increases, and overspending patterns. Change orders can also skew your construction forecasting numbers.

Pro Tip

Set up a system to track your project costs in real-time. If you see a budget problem or a change order coming, deal with it immediately. It’s much easier to fix small issues than big, expensive ones later.

As part of controlling your costs, you should also optimize your equipment usage and management. Track how often you’re actually using your equipment. If a piece of gear sits idle too long, consider selling it or renting it out. For specialized tools you only need occasionally, it’s often smarter to rent than to buy.

Maintain a cash reserve/contingency fund

Building an emergency fund is a prudent exercise for every business. In construction, where cash flow can be unpredictable, it’s essential. A reserve provides peace of mind and financial flexibility to take advantage of opportunities or weather temporary setbacks. Keep these funds separate from operating accounts to avoid the temptation to use them for regular expenses.

Treat a “rainy day fund” like another project expense. Set aside a small percentage (e.g., 5–10%) from every project’s budget into a separate sub-account. This cash is your buffer for unexpected problems or slow payment periods.

It’s also wise to set up alternative funding sources from traditional banks or online lenders. Relying solely on project payments can leave you vulnerable to cash flow gaps that jeopardize your ability to operate effectively. Having diverse funding options, like lines of credit, provides essential flexibility and a safety net for managing temporary cash shortfalls.

Pro Tip

Don’t wait until you’re desperate for cash. Set up a business line of credit before you need it. This way, if a payment is delayed or an unexpected cost hits, you’ve got instant access to funds without panic.

Next steps: Support your cash flow with Bluevine

Bluevine understands the unique cash flow demands that construction companies face every day. The gap between project expenses and client payments doesn’t have to derail your growth plans or create sleepless nights worrying about payroll.

A flexible line of credit could help you bridge those temporary cash flow gaps that are inevitable in construction. Whether you’re waiting for a progress payment, dealing with unexpected project costs, or need capital to take on a larger project, Bluevine offers instant access to funds that keeps your business moving forward.^BVSUP-00127

Plus, with a streamlined business checking account that integrates seamlessly with your construction cash flow management, you’ll have all the efficient banking solutions you need to manage multiple projects, track expenses, and optimize your financial operations.

Don’t let cash flow challenges limit your construction company’s potential. Take control of your financial future with proven strategies and the right financial partner supporting your success.

See how to streamline your construction company’s finances with Bluevine.

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Frequently asked questions about construction cash flow

What is a good cash ratio for a construction company?

A good cash ratio for a construction company is typically 20–50% (0.2–0.5). This means the business has 20 to 50 cents in cash or cash equivalents for every dollar of current liabilities. While a higher ratio offers more liquidity, too much idle cash can signal missed opportunities to invest in growth or operations. The ideal ratio depends on project timelines, payment cycles, and risk tolerance.

What’s the difference between “profit” and “cash flow”?

Profit is what’s left after you subtract all your expenses from your revenue—it’s a snapshot of your business’s financial performance.

Cash flow, on the other hand, tracks the actual movement of money in and out of your business. A construction company can be profitable on paper but still struggle with cash flow if payments from clients are delayed or project costs are front-loaded.

Monitoring both profit and cash flow is critical for long-term financial health.

How often should I review my construction cash flow?

It’s typically a good idea to review your construction cash flow weekly or biweekly, especially during active projects or busy seasons. Construction businesses face fluctuating costs and unpredictable payment schedules, so frequent reviews help you stay ahead of potential shortfalls and make timely decisions about spending, billing, or financing.

When should I consider a line of credit for my construction business?

You should consider applying for a line of credit if:

• Your project costs must be covered before your clients pay their invoices
• You need quick access to funds for equipment, materials, or labor
• You want flexibility to cover short-term gaps without taking on long-term debt, like a traditional loan

A line of credit can help smooth out seasonal dips, fund growth, or protect your cash flow when projects get delayed or clients pay late—and with a revolving credit line, you’ll only pay interest on what you draw.