Cash flow is the single most critical factor in the survival of a construction company. Many contractors with profitable projects have gone bankrupt due to liquidity problems. This article explains how to manage cash flow in construction, understand the S-curve dynamic between inflows and outflows, and prepare for the liquidity challenges typical in the industry.
What Is Cash Flow in a Construction Company?
Cash flow is the movement of real money entering and leaving your company. It is different from your accounting result. A project can be highly profitable "on paper," but if payments arrive months after you've already paid suppliers and labor, your company runs out of cash.
In construction, cash flow includes:
Cash inflows:
- Advance payments from the client
- Paid progress billings
- Released retentions
- Final settlements
- Returned security deposits
Cash outflows:
- Employee payroll (bi-weekly or monthly)
- Payments to material suppliers
- Payments to subcontractors
- Taxes (VAT, income tax withholding, social security contributions)
- Indirect costs (office, insurance, utilities)
The challenge is that outflows typically occur before inflows. This creates financial "bottlenecks" that can push your company into temporary insolvency even on profitable projects.
The S-Curve: The Natural Flow of Receivables vs. Payables
The S-Curve: The Natural Flow of Receivables vs. Payables
The typical cash flow behavior in a construction project follows an S-curve shape. Understanding this dynamic is key to sound financial planning.
Early phase (0–20% completion)
Costs are high (mobilization, initial material stockpiling, site setup) but collections are minimal. The client has not yet certified enough completed work.
Cash flow challenge: You must finance early expenses with little to no income. Working capital is essential.
Development phase (20–70% completion)
Costs reach their peak (structure, MEP, finishes), but collections also begin to grow through monthly progress billings.
Cash flow challenge: Payments still exceed collections. The gap is at its widest. This is the phase of greatest liquidity stress.
Final phase (70–100% completion)
Costs decrease (less work remaining, more completed), while collections reach their peak with the final settlement.
Cash flow challenge: Waiting for full settlement and release of retentions can take 6–12 months after project completion.
Typical Liquidity Problems in Spanish Construction
1. Performance retentions
In Spain, it is common for clients to withhold a percentage of each progress billing (typically 5–10%) as a guarantee of solvency and quality. This retention is released 12 months after completion.
Financial impact: If your project lasts 18 months and the client retains 10%, you wait until month 30 to collect the final portion.
Example:
- Monthly billing: €100,000
- Retention 10%: €10,000
- Net collection: €90,000
- Retention released 12 months after project end
2. Billing certification lead times
Between completing work and certifying it, 2–4 weeks can pass. The client or supervising quantity surveyor takes time to validate and issue the certification. You then issue the invoice, and the client pays in 30, 60, or 90 days.
Financial impact: Between starting work and actual payment, 60–120 days may pass.
3. Client payment terms
In Spain, the legal payment term is 30 days, but many clients pay in 45–60 days.
Financial impact: Each progress billing takes 1–3 months to turn into cash.
4. Late payments from suppliers and subcontractors
Sometimes your suppliers miss their payment deadlines or are outright insolvent.
Financial impact: Labor costs are weekly, but revenue arrives months later.
5. Unforeseen expenses
Scope changes, additional work, construction surprises.
Financial impact: Requires available cash without additional income yet coming in.
6. Initial security deposits
Some contracts require deposits of 5–10%.
Financial impact: Cash tied up for the duration of the project.
Cash Flow Planning by Project
Step 1: Build the cash flow matrix
|
Month |
Progress% |
Actual cost |
Billing |
Retention |
Net collection |
|
1 |
5% |
85,000 |
40,000 |
4,000 |
36,000 |
|
2 |
15% |
120,000 |
80,000 |
8,000 |
72,000 |
|
3 |
28% |
110,000 |
130,000 |
13,000 |
117,000 |
Step 2: Calculate the cumulative gap
Cumulative costs vs. Cumulative collections = Cash flow gap
Example: Month 3: Cumulative costs €315,000 vs. Cumulative collections €225,000 = Gap -€90,000
Step 3: Identify critical points
Months with the largest gap = highest liquidity risk.
Step 4: Plan financing
Options:
- Working capital
- Credit line
- Factoring
- Advance payments from client
Cash Flow Planning at Company Level
Benefit of a project portfolio
Diversifying projects in different phases allows you to offset collections and payments across projects.
Recommendation: Maintain projects at different stages of progress.
Centralized treasury management
- Cash flow projections
- Identification of critical periods
- Bank negotiations
- Weekly monitoring
- Corrective actions
Strategies to Improve Cash Flow
1. Accelerate collections
Request advance payments Bill more frequently Negotiate shorter terms Factoring
2. Defer payments
Negotiate payment terms with suppliers Group payments Evaluate early-payment discounts
3. Optimize costs
Subcontract strategically Forward purchasing
Managing Retentions and Guarantees
Actions:
- Negotiate conditions
- Request early release
- Provision for retentions
- Specific financing
Key Cash Flow Indicators
Cash conversion cycle
DCCC = Execution days + Certification days + Collection days – Supplier payment days
Example: DCCC = 30 + 15 + 45 – 30 = 60 days
Maximum cumulative cash flow gap
Liquidity coverage ratio
(Cash + available credit) / maximum gap
How Trowel Helps with Cash Flow Management
Trowel includes a Cash Flow module that allows you to:
Project cash flows Visibility of receivables and payables Treasury planning Retention management Integration with invoicing
Use Trowel to have complete visibility of your cash flow, anticipate liquidity problems, and make financial decisions based on data.
Request a demo and improve your company's treasury management.
