Relief Capital

Cash flow

How do contractors cover payroll while waiting on draws?

· Answered by Relief Capital Funding Desk

The question

We are a mechanical subcontractor and every job pays on a draw schedule with 10% retainage held to the end. Payroll runs every two weeks regardless. On a good month we are profitable and still short of cash. What do contractors actually use for this?
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The desk's answer

Desk answer

This is the defining cash flow problem of the trade and it is not a sign that anything is wrong with your business. You are financing the general contractor's project out of your own payroll on a 45 to 75 day lag, with 10% of every dollar held back until closeout. Profitable and cash-poor is the normal condition of a growing subcontractor.

  • A revolving line sized to your work in progress, drawn between draws and repaid when they land
  • Construction-specific factoring or progress-billing advances against approved pay applications
  • Supplier and material terms renegotiated to match the draw schedule rather than net 30
  • Mobilization payments written into the contract up front, which cost nothing to ask for and often work

“A subcontractor's balance sheet is mostly other people's schedules.”

— Relief Capital Funding Desk

On sizing, two payroll cycles plus one month of material is the usual floor, and retainage on an active backlog is money you should count as an asset but never as available cash. The warning is growth: a subcontractor that doubles its backlog doubles the working capital it has to carry, and the most common way a busy contractor fails is winning too much work too fast without a facility behind it.

A Business Line of Credit is the base facility, with Invoice Factoring against approved pay applications when the backlog outruns the line. Call the desk with your work-in-progress schedule and your aging — in this trade those two documents settle the answer faster than the tax return does.

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