Master Your Cash Flow Lifeline: A Consultant’s Guideto Booming in Construction Contracting

Master Your Cash Flow Lifeline: A Consultant’s Guide to Booming in Construction Contracting

by Dan Doyon, Maxim Consulting Group

As a management consultant with many years of experience working with clients in the construction industry, I have been to job sites that smelled like fresh sheetrock and desperation. The sound of machinery could not drown out the quiet panic of a payroll deadline that was coming up, like a Maine nor’easter. The first big lesson I learned came from working with a midsized southern contractor in the early 1990s who was building a $12 million school addition. On paper, everything looked great: the bids were won, the team was chosen, the subcontractors were lined up, and the permits were issued. But the crew left when the bank account ran out of money in the middle of the project, because customers were late with payments, and material prices rose unexpectedly. Liens piled up, and the company was about to go bankrupt. I was called in, and we turned things around with a ruthless overhaul of their cash flow, but it cost them six figures in legal fees and lost trust. That almost happened? I will never forget it. I tell all of my clients, from data centers to rural infrastructure projects in the U.S. and Canada, the same thing: cash flow is not only crucial in construction contracting; it is what keeps your business alive. Even the best-planned project will become a grave marker if you ignore it. This is not going to be a boring review of accounting; it is advice that has worked for dozens of contractors through good times, bad times, and everything in between. We will discuss why tracking cash flow is the most essential part of running a construction business, the mistakes even experienced operators make, and how to use reports from your accounting system as a strategic tool. I will use examples from my clients’ companies to show how turning data into dollars can turn a reactive scramble into a proactive powerhouse. In the end, you will have a plan to protect your cash flow, grow your business in a way that makes sense, and sleep better knowing

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Cash Flow in Construction: It Is More Important Than Profit on Paper Think about this: Your estimator gets a $5 million bid for a commercial strip mall with a 15% profit margin. The PM’s plan has all the milestones laid out in a nice chart, the subcontractors are ready to go, and your team has completed a pre-buy on materials. But six months later, the client will not pay the $200,000 progress payment because they disagree with the punch list. Your supplier wants cash on delivery for the materials after the price goes up, and the new lift lease costs more than you thought it would. Your profit forecast is now a bad joke, cash is king, and your cash is leaving the castle. In construction, unlike retail or manufacturing, where inventory helps sales cycles, we work on projects where money comes in slowly and goes out quickly, like a pipe that bursts. I see most contractors facing bankruptcies are not because they are not making enough money, but because they do not have enough cash. This is often because of the industry’s trademark: long payment terms that average 60 to 90+ days, while expenses come up every week. I have seen it happen with a Texas client who was branching out into multifamily housing. Oil prices fell sharply in 2015, which hurt demand for homes. Their backlog was strong, but they did not get paid by clients for 120 days because the economy was shaky.

They used up a $1.2 million line of credit to pay 150 workers’ salaries without closely watching their cash flow. We stepped in with phased invoicing based on milestones, helping them recover $800,000 in overdue payments and keep their business running smoothly. What you should remember is that if cash flow stops, profitability reports are wrong. Cash flow is most important in three main areas: operational resilience, growth scalability, and risk reduction. It keeps things running smoothly daily. Before any work can start, construction needs money up front. Ten to twenty percent of a project’s budget can go toward mobilization costs. Because our business depends on skilled workers, they expect to be paid, not IOUs. Many of our clients say that their biggest problem was finding enough people to work for them. This is even worse when you have cash flow problems that make it take longer or cost more to hire people. My Florida client had a lot of work to do after a hurricane, but the price of materials also went up. Their cash reserves dropped below 5% of their monthly costs, triggering a vicious cycle: they had to hire subcontractors quickly at high rates to meet deadlines, worsening their cash flow. We smoothed outflows by making weekly cash flow forecasts and negotiating bulk supplier terms that saved 8% on steel and kept crews busy. Cash flow is what sets survivors apart from scalers. Want to put in a bid on that $50 million airport terminal? Underwriters review liquidity ratios, such as the current

ratio (assets/liabilities) and the quick ratio (cash plus receivables over current liabilities), to assess your bonding capacity. Most benchmarks indicate that healthy contractors should have scores of 1.5 to 2.0 for both. If your score is below 1.0, sureties will tend to avoid you. I have worked with companies, including one based in the Pacific Northwest, that wanted to enter the public works market. Their quick ratio was 0.8 in 2020, which led to a significant contract falling through due to COVIDrelated supply issues. We changed the way we handled receivables by factoring 20% of slow-paying government invoices at a 1.5% fee. This raised it to 1.6 within quarters, opening up $30 million in new bids. Cash flow is not just for paying bills; it is also what lets you grow your business, buy new equipment, or get new technology like BIM software without losing equity. The last part of the triad is risk mitigation. Many things can go wrong in construction, such as bad weather, change orders, and lawsuits. I see most disputes further destabilize cash flow and delay up to 40% of projects. Bad management can trigger a chain of problems, including supplier liens, subcontractor mechanic’s liens, and even OSHA fines for safety shortcuts when budgets are tight. I took on a client in 2018 after a hospital renovation went $2 million over budget. A union strike caused delays that froze $1.5 million in retainage. Because they did not monitor their cash flow, vendor checks bounced, damaging their relationships with vendors and increasing future costs by 12%. A forensic cash flow audit showed the bleed, so we switched to contingency reserves set at 5% of contract value to stop the loss. Cash flow management is not just a job in the back office; it is the center of strategic command. It gives people the power to make choices: Should you wait to buy that land? Speed up collections on a flaky client? My decades confirm: According to Deloitte’s construction insights, companies that use cash flow as a dashboard metric see 25% more revenue growth than their competitors. If you do not pay attention to it, you are not building; you are betting. Common Cash Flow Pitfalls and How They Derail Contractors The construction industry is full of companies that have gone bankrupt due

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to insufficient funds. These are not things that happen magically; they result from optimism bias, siloed operations, and old habits. Finding them is half the battle; fixing them is the reward. First, the trap of overcommitting. It is in our DNA to bid aggressively to win work, but that often means thin margins (3–5% net is the industry standard) stretched over several years. Take overbidding volume without being able to control it: A contractor takes on five jobs worth $10 million each, putting down $2 million each up front. That is $4 million down the drain if two clients put off getting their certifications. Another client fell here in 2012 while working on three bridge rehabs. Estimators lowballed mobilization by 15% because they expected progress payments to remain the same. What happened? Allowing problems to occur pushed outflows 45 days ahead of inflows, resulting in $900,000 in working capital costs. We looked at it through job cost reports (more on those later), which showed the mismatch – cutting one project brought in cash and focused firepower. People who do not pay their bills on time are the biggest problem. Clients, especially big developers or government agencies, use payment terms like a club, with an average of roughly 75 days. If you add approval delays, it is over 100. Subcontractors and suppliers who are paid net 30 days widen the timing gap. When I worked with Southeast framer in 2021, 40% of their $3 million condo project billings were more than 90 days old because the

architect had to sign off on them. The first cash outflow for lumber was $1.8 million, but the inflows were slow, so a $500,000 bridge loan at 7% interest was needed. The answer? Milestone-based invoicing with escalation clauses, which shortens the time to 45 days and saves $35,000 in interest. Another silent killer is failing to take change orders seriously. Scope creep can add 10–20% to budgets, but approvals take a long time. If you do not have cash reserves, you are paying for things on credit. I have seen it ruin businesses. For example, a mechanical contractor had to pay $400,000 to move steel that was not approved for a warehouse expansion. They were behind on their bookkeeping, so they added extras to the base contract and hid the drain until the end of the quarter. The cash flow statements showed we had gone over budget, so we put pre-approval holds on spending over $10,000 and recovered $250,000 through negotiated credits. Poorly managing vendors and subcontractors makes things worse. The “pay now, chase later” attitude with trusted partners eats away at cash reserves. Prices of gas go up? Subs send it to you through backcharges. In 2022, a developer paid subcontractors net-15 to get bids, but they received net-60, costing them $600,000 in float per year. There were arguments because lien waivers were not connected to payments. Joint check agreements made things easier by allowing money to be brought in and sent out in the same way. The last mistake is the forecasting fallacy: Gut-feel predictions that do not

account for changes in the economy or the weather. In the North, winter slows things down, and in the South, hurricane seasons slow things down. In the offmonths, cash drops by 30%. Without scenario modeling, surprises come out of nowhere. A client from 2016 did not care about tariff increases on imported fixtures. A 25% increase in data center construction costs wiped out $700,000 in profits before anyone noticed. These problems do not have to happen; they are just information gaps. Based on my experience, a weekly cash audit avoids issues. If you spot them early, you do not just survive; you thrive. Your Company’s Accounting System Is The Control Center for Your Cash Flow My accounting system is more than just an old ledger; it is a crystal ball, radar, and war room all in one. In an industry where data from yesterday can cause problems today, modern platforms like Foundation, Spectrum, Sage 300, or Procore-integrated ERP are not optional; they are essential for real-time visibility. I have moved many clients from spreadsheets to cloud-based systems with dashboards that predict cash flow with 95% accuracy up to 90 days in advance. Mobilization costs can range from 10% to 20% of a project’s budget. Skilled workers want to be paid, not IOUs, because our business depends on them. Most contractors tell me they cannot get enough workers to staff jobs. This is even worse because of cash flow problems that make it take longer or cost more to hire people. My Florida client had a lot of work to do after Hurricane Irma, but the price of materials also went up. Their cash reserves dropped below 5% of their monthly costs, which started a vicious cycle: to meet deadlines, they had to hire subcontractors quickly at high rates, which made their cash flow worse. Construction is complicated because it involves many different jobs, WIP (WorkIn-Progress) accounting, and retainage. A strong system tags transactions by project, phase, and cost code. This makes it easy to see how much money is coming in and going out. For example, integrating with job costing modules keeps track of changes in real time, warning of overruns before they get out of hand. In 2018, a California general contractor client of

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mine stopped using an outdated system and started using Viewpoint Spectrum. Before the upgrade, monthly closes took 40 days. After the upgrade, they only need seven business days, and there are automated alerts for Accounts Receivable items that are more than 60 days old. What happened? More than $1.4 million more in collections each year. How to use this power: Make it your own. Make your chart of accounts work for you, and ensure your accounting system is tied into your estimating and project planning tools so that bids and bills flow smoothly. But the magic happens when you report. Accounting systems create a range of reports, from custom cash flow projections to balance sheets. I will focus on the most important ones for management and give you step-by-step instructions. It is not about running reports; it is about questioning them. I teach my clients to check in every week instead of every three months, treating cash flow like a daily stand-up. Specific Reporting Tools and Tactics for Cash Flow Mastery Now, the meat: How to find cash flow gold in the reports from your accounting

Specific Reporting Tools and Tactics for Cash Flow Mastery Now, the meat:

How to find cash flow gold in the reports from your accounting

system. With examples from clients, I will show you how to use four powerful reports, step by step. These are not just ideas; I have actually changed red ink to black ink in real-life situations.

1. The Cash Flow Statement: Your Liquidity Weather Report

The cash flow statement has three parts: financing, investing, and operating. It explains how cash flows work and compares recorded profits to real cash. Run it every month in Foundation, Spectrum, Sage 300, or your accounting system. How To Use It:
Step 1: Look at the Operating Cash Flow (OCF). Take away increases in AR/AP from net income and add in non-cash costs like depreciation. Positive OCF indicates collections are going well, while negative OCF indicates billing is behind.
Step 2: Make a 13-week rolling forecast. Use historical data, such as average monthly OCF, to compare with the pipeline and plan for the next quarter. If OCF falls below 10% of revenue, take steps like freezing expenses.
Step 3: Check for differences. If the difference between actual and budget exceeds 5%, conduct a deep dive to identify the cause. Real-life Example: A $15 million highway

project in the Midwest in 2022 had an OCF of -$150,000 even though it made $1.2 million in profits. The state was slow to pay, so Accounts Receivable grew quickly. The statement showed that Accounts Payable increased by $300,000 due to subcontractor bills. We used it to decide which collections were most important and to agree on net-45 terms with subcontractors. Result: By the third quarter, OCF had turned positive, saving $400,000 in credit. They now run statements every two weeks, which they say has helped them grow 15% every year.

2. Aging of Accounts Receivable: The Collections Alarm System Report

This gem sorts unpaid bills by age (0–30, 31–60, etc.), and it would be great if it could also break them down by customer or project.
How to Use It:
Step 1: Sort the Buckets. More than 60 days? Flag for calls right away. To find DSO (Days Sales Outstanding), divide Accounts Receivable by Daily Sales. The goal is to keep it under 60 days.
Step 2: Look at the trends. Watch for changes or spikes in the 61-90 days bucket from month to month. These are signs of problems with clients.
Step 3: Automate actions. Set up alerts

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for items worth more than $5,000 that are older than a certain date. Send reminder emails by hand or automatically. Real-life Example: Five years ago, I worked with an asphalt company in the Northeast that had $2.1 million in Accounts Receivable, 35% of which were overdue by more than 90 days on city contracts. The aging report showed that three clients were fighting over $800,000. We wrote down a plan for how to handle things: Day 61, a polite reminder; Day 76, an escalation to the PM; and Day 91, a lien notice. In 60 days, we received $1.4 million, a 21% increase in cash, along with progress payment retainage releases.

3. Job Cost Reports: Profitability Cash Implications

These track the actual costs of each job against budgeted costs and often show earned revenue vs. billed revenue on WIP schedules.
How To Use It:
Step 1: Change how you handle issues. Overruns in labor and materials? Code for money going out. Is the WIP underbilled by more than 10% of the contract? Bill right away.
Step 2: Figure out the cash burn rate. If cumulative costs exceed the budgeted pace, front-load the inflows.
Step 3: Making a scenario model. Extra stress test for “what if”: Add a $50,000 change order. What does it do to cash flow?
Real-life Example: For instance, a job cost report for an $8 million client fabricating company showed that changes to the design had caused $250,000 more in welding labor than was charged. More money was going out than coming in, straining reserves. We got back $180,000 through change orders and set WIP limits for partial billings at 80% completion.

4. Accounts Payable Aging and Vendor Reports: Slow the Flow

Make aging lists for Accounts Receivable and Accounts Payable that show bills by due date and total amounts owed to vendors. How To Use It: Step 1: Put the most important things first. Sort by vendor dependency (for example, concrete suppliers first) and pay 0–30 to avoid problems.

Step 2: Chase the discount. Find early payment options (2/10 net 30) and figure out the return on investment (ROI), which is usually 20% per year. Step 3: Use your negotiation power. High-volume vendors get longer terms when they spend a lot of money. Real-life Example: A client in the Northwest had $1.3 million in accounts payable, 40% of which were more than 30 days overdue. This meant that they could lose 5% of their equipment lessors’ fees. My analysis showed that payments were divided: small vendors got net-15, and big ones got net-60. We worked together and negotiated, extending the terms on 60% of the spending to net-45. This saved us $65,000 in fees. It maintained the current ratio at 1.8 by balancing outflows with cash flows from operations. Cross-reference Accounts Receivable aging with job costs to find underbilled opportunities, or Accounts Payable with cash statements to find pay sequencing. Based on my experience, clients who use tools like Power BI to track their cash flow see their cash flow become significantly less volatile. It is data democracy. Give your PMs read-only access to encourage ownership.

Strategies and Best Practices: Building a CashResilient Company

Execution seals the deal with reports in hand. Here are some proven strategies I have used with clients, detailed by each step for you to follow. Step 1: Change the rules and the way things are done (Months 1–3). Write down a cash flow policy that includes a billing schedule (every week for progress), approval workflows, and a 5% limit on retainage. Teach your employees by holding workshops. I once led a two-day session for a company that cut billing mistakes by 30%. Every week, reports should be reviewed at every leadership meeting. Step 2: Get the tools you need, both tech and tactics (months 4–6). Use mobile apps to get approvals in the field, which speeds up Accounts Receivable by 20 days. Factor receivables at rates of 1% to 2% for big public jobs. Set aside $500,000 to $1 million in cash, which is enough to cover one to

two months’ worth of expenses. For a 2019 client, we combined lines of credit with Accounts Receivable financing, reducing costs to 4% and helping cover a 25% increase in backlog. Phase 3: Advanced Moves: Constant Improvement and Strength. Every three months, make plans for three different situations: the base case, the upside (early payments), and the downside (late payments). Use clauses in contracts to protect yourself from risks, including material escalation pass-throughs, force majeure extensions, and pandemics. Things to keep track of: Cash conversion cycle should be less than 60 days, and EBITDA coverage should be more than 1.5 times debt service.

Conclusion

Cash flow management is not a checkbox. It is the engineering that holds your company upright. If nothing else, if you can master cash flow management, and you do not just endure cycles, you dictate them. Profits will follow a managed cash stream.

About the Author

Dan Doyon is an independent consultant based in Dallas, Texas, and Director at Maxim Consulting Group (www. maximconsulting.com). He works with construction-related companies to solve complex business challenges to increase revenue and profitability. With his guidance, companies have driven over $160 billion in top-line sales growth and hundreds of millions in operational savings through improved processes. Dan specializes in business transformation and turnarounds, has published research papers and trade articles, and is an acknowledged industry speaker. Dan received his MBA from Georgetown University. He can be reached at dan.doyon@maximconsulting.com.