Why can a profitable project still run out of cash?

Because profit and cash are measured at different times. Profit is whether the price exceeds the cost over the whole job; cash is whether money is in the account this month. A contractor pays labor weekly and suppliers in thirty days, but bills the owner monthly and collects weeks after that, minus retainage held back. On our example, by mid-project about $5.4M of cost has gone out while only $5.13M has been collected, a $0.27M hole on a job that is comfortably profitable overall. The profit is real; it simply has not arrived yet. Running out of cash, not running out of profit, is what most often sinks a construction company.

How does retainage affect cash flow?

Retainage is the single largest drag on construction cash flow. When the owner withholds ten percent of every payment, the contractor funds that ten percent out of its own pocket for the entire job, because it is still paying its costs in full while collecting ninety cents on the earned dollar. On our $12.0M project, ten percent retainage on $5.7M billed to date is $0.57M the contractor has earned but not been paid. That money is released at substantial completion, which is why the cash position recovers sharply at the end, but for the length of the job it is working capital the contractor has to supply, often through a line of credit.

What is an S-curve and how does it relate to cash flow?

An S-curve is the cumulative cost-or-billing curve plotted over time, slow at the start, steep through the middle, and flattening at the end, the shape most projects trace. Cash flow is read from two of these curves at once: cumulative cost out and cumulative payment in. Because the payment curve sits below and behind the cost curve, the vertical gap between them at any point in time is the cash the contractor is financing. Projecting both curves forward turns the cash-flow question into a planning tool: it shows when the gap is widest and how large a credit line the job will need to carry it.

Construction Glossary · Financial & Accounting

ConstructionCash Flow

The money goes out before it comes in. Profit says the job is fine; cash decides whether you survive to collect it.

Definition

Construction cash flow is the timing of money moving out of and into a project: costs go out as work is performed, while payment comes in weeks later and reduced by retainage. The lag, widened by the retainage held back, routinely pushes even a profitable job cash-negative in the middle of the work, until that retainage is released at closeout and the position recovers.

Money out before money in

Cumulative cost runs ahead of cumulative collection for the whole job. The gap between the curves, roughly $0.27M here and driven by $0.57M of retainage held, is the working capital the contractor has to supply.

Four things that open the gap

Retainage

Ten percent withheld on every dollar earned, funded by the contractor until closeout. The largest and most predictable drag.

Payment lag

Costs are paid weekly and monthly; the owner certifies and pays weeks after the application. Work is financed in the meantime.

Front-loaded costs

Mobilization, long-lead materials, and early labor go out before much has been billed, deepening the early hole.

Slow-paying change orders

Work directed and performed but not yet approved is cost out with no billing against it, widening the gap further.

The withheld amount is retainage; each period’s payment is a draw.

How POD charts the cash position

POD reads your pay applications into a period cash flow, your billings to the owner as cash in and your subcontractors’ billings as cash out, and charts it on the report’s claims and commercial tab, drawn from the same pay-app records rather than rebuilt in a separate spreadsheet. The chart appears once there are at least two pay applications to plot; until then POD shows an upload prompt, never a fabricated curve. POD surfaces the position from the records you give it; it does not move money, and it does not present a projection as if it were a fact.

Construction billing methods guide

Frequently asked questions

Each payment is one draw in the curve

The collection curve is built one period at a time, each the net amount due on a pay application. See how a single draw is calculated.

The Construction Draw Back to the Glossary