Your Construction Company Has $10 Million in Contracts—So Why Are You Always Short on Cash?

Imagine your construction company has $10 million of signed contracts. Your crews are working, equipment is moving, subcontractors are busy, and you have more projects than ever. From the outside, business looks incredible. But every Friday you're checking the bank account to make sure you can cover payroll. How can a company with $10 million of work be struggling for cash?

Imagine this.

You own a construction company. A few years ago, you were doing $2 million annually. Then $4 million. Then $7 million. Today, you have approximately $10 million of work under contract.

That sounds fantastic. But Monday arrives: material suppliers. Tuesday: equipment payments. Wednesday: insurance. Thursday: subcontractors. Friday: payroll.

Meanwhile, one customer hasn't paid your draw, another invoice is disputed, a change order isn't approved, retainage is held, and hundreds of thousands sit in accounts receivable.

Because in construction, having work is not the same as making money. And making money is not the same as having cash.

A $10 Million Backlog Does Not Mean You Have $10 Million

Signed contracts do not mean $10 million is sitting in the bank. Work may be performed over months or years, while employees, subcontractors, materials, equipment, insurance, permits, fuel, and overhead may need to be paid before customers pay you.

Construction companies often spend money before they get paid. That creates a working-capital challenge.

Imagine Winning a $2 Million Project

A $2 million award can require more employees, materials, equipment, subcontractors, project management, insurance, and perhaps bonding.

You may spend hundreds of thousands before enough customer cash arrives.

Winning a large contract can make your cash position worse before it makes it better.

Revenue Is Not Profit

Contractor A has $10 million of annual revenue and $800,000 of profit. Contractor B has $7 million of revenue and $1.2 million of profit.

Contractor A is bigger, but Contractor B makes more money.

The better question is not only how much work you have. It is how profitable that work is.

Every Job Should Have Its Own P&L

If your company has 15 active projects and a company-wide P&L shows $500,000 of profit, which projects generated it?

Project A may earn $250,000, B $175,000, C $125,000, while D loses $150,000.

Profitable projects can hide a losing job. This is why construction companies need job costing.

What Is Job Costing?

Job costing asks: What did this specific project actually cost us?

That can include labor, materials, subcontractors, equipment, permits, insurance allocations, and other direct costs.

Compare those costs with contract revenue, approved change orders, and expected total cost to understand project profitability.

Imagine a $1 Million Contract

You estimate a $1 million contract will cost $800,000 and earn $200,000.

Then materials increase $40,000, labor overtime $30,000, a subcontractor goes $25,000 over budget, and rework costs $20,000.

Expected cost becomes $915,000 and expected profit falls to $85,000.

Revenue did not change. Profit did.

A Job Can Look Profitable Until the Very End

A project can be 80% complete and appear healthy based on billings while unresolved change orders, punch-list items, warranty obligations, unreceived subcontractor bills, and remaining work still exist.

Update estimated costs to complete so profit does not disappear in the final month.

Estimated Cost to Complete Matters

For each major project, ask what has been spent, what is committed, what remains to be spent, what changed, and what the expected final cost is.

The original budget should not remain untouched while the project changes around it.

Change Orders Can Make or Break a Job

If a customer asks for extra work and the crew performs $30,000 of labor and materials without an approved change order, you have extra cost without guaranteed extra revenue.

Track submitted, approved, rejected, and pending change orders.

“We'll Get It Approved Later” Is Dangerous

If 10 unapproved change orders total $400,000 and internal reports assume all will be collected, but only $250,000 is approved, $150,000 of expected revenue disappears.

Do not treat pending change orders like cash in the bank.

Retainage Can Create a Major Cash Problem

If a customer holds 10% retainage on $5 million of work, $500,000 may remain unavailable even though employees, subcontractors, and materials have already been paid.

Retainage needs to be tracked separately.

Profit Doesn't Pay Payroll Until It Becomes Cash

Your financial statements may show $1 million of profit while customers owe $2 million, retainage is $600,000, cash is $200,000, and Friday payroll is $180,000.

Profit and cash flow are different.

Accounts Receivable Aging Is Critical

A $2 million receivable balance sounds like money coming, but if $700,000 is over 90 days old, you may have a collection problem.

Track current, 30-day, 60-day, 90-day, and older receivables.

Revenue You Cannot Collect Is Not Helping You

A sales team may chase $5 million of new projects while $1 million of completed work remains unpaid.

Collecting old work can be just as important as winning new work.

Billing Errors Delay Cash

A $250,000 pay application can be rejected because of a missing lien waiver, incorrect schedule of values, missing support, wrong completion percentage, or insurance issue.

Administrative processes directly affect cash flow.

Your Billing Department Is Part of Cash Management

Billing should not be “send invoices when someone has time.”

The faster accurate billing goes out, the sooner the payment clock begins. One week of delay across millions of annual work can create meaningful working-capital pressure.

Underbilling and Overbilling Need Attention

If $800,000 of work is complete but only $650,000 has been billed, the company may be financing the project for the customer.

If billings run ahead of economic work performed, cash can look stronger than reality because some of that money may need to fund future work.

Neither situation should be understood from the bank balance alone.

WIP Reporting Can Be Extremely Valuable

A Work-in-Progress schedule can help management understand contract amount, approved change orders, estimated total revenue, costs incurred, estimated costs to complete, estimated gross profit, percentage complete, billings, overbillings, and underbillings.

This can provide a much better view of project performance than the bank account.

Labor Overruns Can Destroy Margin

If a project was estimated for 5,000 labor hours but uses 7,000, the additional wages, payroll taxes, workers' compensation, benefits, and overtime can destroy margin.

Track labor by job so you know which project caused the problem.

Materials and Commitments Matter

Material prices can change between estimating and construction. Also, incurred cost alone may omit committed purchase orders and subcontracts not yet invoiced.

Management needs visibility into both actual and committed costs.

Subcontractor Management Is Financial Management

A subcontractor may start at $200,000 and grow to $260,000 through changes.

Were those changes billed to the customer? Approved? Included in the forecast?

Subcontractor changes should flow into job-cost reporting.

Equipment Is Expensive Even When It's Paid Off

A paid-off excavator, crane, loader, truck, or trailer still has fuel, repairs, maintenance, insurance, depreciation, transportation, operator, and downtime costs.

Equipment should be considered when evaluating project profitability.

Renting Versus Buying Needs Analysis

Buying a $300,000 piece of equipment versus renting depends on utilization, financing, maintenance, storage, future projects, resale value, and tax treatment.

Do not buy equipment solely because you need deductions.

A Tax Deduction Does Not Make Equipment Free

If you spend or finance $250,000 of equipment, you still committed $250,000.

Tax treatment can make the purchase more attractive, but the equipment should make business sense first.

Equipment Debt Can Consume Cash

Ten equipment loans totaling $75,000 per month consume $900,000 of annual cash.

The P&L may not show the entire amount as ordinary expense because principal and interest are accounted for differently, but the bank account feels the payment.

Understand profit, balance sheet, and cash flow.

Insurance and Labor Burden Matter

General liability, workers' compensation, commercial auto, equipment coverage, umbrella coverage, and other insurance can be significant.

An employee earning $25 per hour also carries employer payroll taxes, workers' compensation, benefits, overtime, and other costs.

Estimating should consider the real labor burden.

Bonding Capacity Can Depend on Your Financial Statements

Surety companies may evaluate working capital, net worth, profitability, backlog, financial statements, and job performance.

Poor accounting can limit a contractor's ability to pursue larger bonded work.

Good financial reporting can become part of your growth strategy.

Banks Care About the Balance Sheet Too

A contractor asking for a $1 million line of credit may have $10 million of contracts, but the bank may still ask about cash, accounts receivable, debt, working capital, profit, and equity.

Backlog does not replace financial strength.

Your Line of Credit Should Not Hide Bad Jobs

A line of credit is useful for working-capital timing, but more borrowing does not fix losing jobs, slow collections, excessive owner distributions, or uncontrolled expenses.

Debt can temporarily hide an unprofitable business.

Owner Distributions Can Create the Cash Problem

If an owner takes a $300,000 distribution while profit is tied up in receivables, retainage, equipment, and working capital, the company may later borrow to cover payroll.

Distributions need to be coordinated with actual liquidity.

Taxes Need to Be Planned Before Year-End

Construction tax accounting can involve cash or accrual methods, percentage-of-completion concepts, long-term contracts, completed-contract treatment where available, retainage, inventory, equipment depreciation, and entity structure depending on the company's facts.

This is not an area where the owner should wait until March and ask what the company made last year.

Imagine Owing Tax on Profit You Haven't Collected Yet

Depending on the company's tax accounting method and circumstances, taxable income and cash collections may not line up perfectly.

The tax return may recognize substantial income while cash is still sitting in accounts receivable.

Tax planning and cash-flow planning need to happen together.

Your CPA Should Understand Construction

Construction accounting can involve job costing, WIP, retainage, overbillings, underbillings, equipment, long-term contracts, subcontractors, payroll, bonding, and multiple entities.

A contractor needs accounting that reflects how the business actually operates.

What Should a Construction Owner Review Every Month?

Review revenue, gross profit, gross-margin percentage, profit by job, estimated profit by job, cost to complete, backlog, approved and pending change orders, accounts receivable and aging, retainage, underbillings, overbillings, payroll, labor by job, equipment costs, debt, cash, working capital, owner distributions, tax reserves, and for larger contractors, WIP reporting.

The goal is simple: Know where you're making money before the project is already finished.

Growth Can Be Dangerous in Construction

A company growing from $3 million to $5 million to $10 million to $20 million needs more payroll, management, equipment, working capital, insurance, systems, and risk capacity.

A construction company can literally grow itself out of cash.

More Contracts Are Not Always Better

Before accepting $5 million of additional work, ask whether you have the people, working capital, equipment, management, bonding, credit, and cash to perform it profitably.

Sometimes the best contract is the one you do not take.

How LUNA CPA Helps Construction Companies Understand the Numbers

At LUNA CPA, we want construction-company owners to understand more than: “We have a lot of work.”

We want you to understand whether that work is actually creating profit, cash flow, working capital, and long-term value for the business.

A contractor can have millions of dollars under contract and still struggle financially if jobs are not being costed correctly, receivables are slow, change orders are not being collected, or cash is tied up in retainage and equipment.

Depending on your needs, LUNA CPA can assist with monthly accounting, financial statement preparation, P&L and balance-sheet reporting, cash-flow analysis, job-cost accounting, project-level profitability reporting, WIP reporting support, A/R and aging analysis, retainage accounting, overbilling and underbilling analysis, payroll accounting, labor-cost analysis, equipment and fixed-asset accounting, loan and equipment-debt accounting, depreciation planning, owner compensation and distribution planning, tax projections, estimated-tax planning, business tax-return preparation, QuickBooks setup and cleanup, financial reporting for banks and lenders, CPA-prepared financial statements when needed, and ongoing CPA advisory.

For contractors with multiple projects running at the same time, we can help structure accounting so ownership can compare job against job instead of seeing only one company-wide profit number.

Our goal is to help you understand which jobs made money, which lost money, where cash is tied up, what customers owe, how much retainage is outstanding, how much debt the company carries, what the expected tax position looks like, and whether additional contracts are actually making the company stronger.