Why profitable jobs still run out of cash
A subcontractor can win a job with a healthy margin and still struggle to make payroll halfway through it. The reason is timing. Payroll goes out every week the crew works. Suppliers want payment in 30 days. But the pay application for this month’s work is paid 45 or 60 days later, and 10% of it is held as retainage until the end of the job.
The result is a cash gap that grows through the busiest months. This forecaster shows how deep it gets and when it closes.
How the forecaster works
- Work is spread across the months using the billing curve you choose. Each month’s billing is the contract value times that month’s share.
- Costs follow the work. Your cost is a percentage of the contract value. The payroll share is paid in the month worked. The rest (material, equipment, lower-tier subs) is paid after your supplier terms.
- Retainage is held on each billing at your retainage rate, dropping to the reduced rate once half the contract has been billed.
- Payment for each month’s billing, less retainage, arrives after the payment lag you enter.
- Retainage is released in one payment, the set number of days after the last month of work.
Each month shows cash in, cash out, net cash and the running balance, starting from the cash you have on hand. Cash you need is the extra funding required to keep the balance from going below zero.
A worked example
An electrical subcontractor has an $850,000 contract over 8 months on an S-curve. Their cost is 84% of the contract (a 16% gross margin), and 45% of that cost is payroll. Suppliers are paid in 30 days. Retainage is 10%, reduced to 5% after 50% billing. Payment arrives 45 days after each pay application, and retainage is released 90 days after the work ends. They start with $60,000 in the bank.
| Month | Billed | Cash in | Cash out | Running balance |
|---|---|---|---|---|
| 1 | $46,370 | $0 | $17,528 | $42,472 |
| 2 | $94,807 | $0 | $57,260 | ($14,788) |
| 3 | $131,880 | $41,733 | $93,652 | ($66,706) |
| 4 | $151,943 | $85,327 | $118,363 | ($99,743) |
| 5 | $151,943 | $118,692 | $127,632 | ($108,684) |
| 6 | $131,880 | $136,749 | $120,048 | ($91,983) |
| 7 | $94,807 | $136,749 | $96,766 | ($52,000) |
| 8 | $46,370 | $125,286 | $61,329 | $11,958 |
By month 5, the busiest point of the job, the account is $108,684 below zero, even after spending the $60,000 on hand. That’s the working capital the job needs. Cash turns positive in month 8, and the last $71,347 of retainage doesn’t come back until month 13, five months after the work is done.
The job earns $136,000 gross profit, but only if the company can carry more than $108,000 through the middle months.
Two jobs like this at the same time need more than $200,000 of working capital. That’s the conversation to have with your bank before you sign the second one.
Ways to close the gap
- Negotiate the retainage reduction. A drop to 5% at 50% complete kept between $2,300 and $6,600 a month more in the contractor’s account in months 6 to 8 of this example.
- Bill for stored materials. If the contract allows it, billing for material delivered to site but not yet installed pulls cash forward.
- Front-load the schedule of values within what’s reasonable, for example by pricing mobilization and early work realistically.
- Match supplier terms to your payment terms. Net 60 from a supplier on a job that pays in 45 days changes the whole curve.
- Chase pay applications. Every week the payment lag shrinks is a week less of financing.
Related tools
Cash flow depends on margins. Check that your markup covers overhead with the overhead and markup planner, and that labor is priced at true cost with the labor burden calculator. Mid-job extras affect cash too, so price them properly with the change order calculator.