How to Manage Cash Flow in Construction: A Guide for Denver Trades

It is a specific kind of anxiety that settles in on a Wednesday morning when you run a construction firm. You have three large projects moving at full speed across the Denver metro area. Your crews are on site. Materials are being delivered. The work is good and your reputation is growing.

On paper, your Profit and Loss statement looks fantastic. You are profitable. You are growing.

Then you look at the business checking account.

The balance is dangerously low. Payroll is due this coming Friday. The draws you submitted for the ongoing jobs have not hit the bank yet. One is stuck in a slow approval process with a general contractor. Another is delayed because the bank requires an inspection.

You are rich on paper but poor in cash.

This is the most common failure point for construction businesses. It does not matter how skilled your tradespeople are or how much work you have won. If you cannot bridge the gap between paying for labor and receiving payment for that labor, the business stalls.

Cash flow management is not just about keeping the lights on. It is about maintaining the ability to take on the next job. Here is how to manage the unique financial pressure of the construction cycle.

Understanding the Cash Gap

The fundamental problem in construction is the timing mismatch. Your expenses are immediate and rigid. Your labor force expects to be paid weekly or bi-weekly. Your suppliers often demand payment within 30 days.

Your income is slow and variable.

You might be on a "Net 30" or "Net 60" payment schedule. In reality, the clock often does not start ticking until the pay app is approved, which can take weeks. This creates a cash gap. You essentially lend your client money to build their project. You pay for the materials, the labor, and the insurance upfront. You get reimbursed later.

If you grow too fast, this gap widens. A rapidly growing construction company is often the one most at risk of running out of cash. Taking on three new jobs requires three times the upfront cash layout before the first dollar of revenue comes back in.

The Problem of Retainage

To make matters more difficult, the industry standard of retainage holds back your profit.

General contractors or owners typically withhold 5% to 10% of every payment until the project is substantively complete. If your net profit margin on a job is 10%, that means you are operating at breakeven cash flow for the duration of the project. Your actual profit—the money you can use to grow or save—is locked away until the very end.

You must plan your cash flow with the assumption that the retainage is a bonus you will receive months down the road. You cannot rely on it to cover next week's overhead.

Negotiation is the First Line of Defense

Many contractors accept the payment terms handed to them without question. This is a mistake. The contract phase is the only time you have leverage to protect your cash flow.

You should push for a mobilization deposit.

Ask for 10% or even 15% upfront to cover the initial costs of getting crews and equipment to the site. This primes the pump. It ensures you are not immediately in the red on day one.

You should also negotiate the billing schedule. If a project is expected to last six months, monthly draws are standard. However, if you are a smaller sub-contractor, you may be able to negotiate bi-weekly billing. Even cutting the payment cycle down by seven days can save you from dipping into a line of credit.

Be wary of "Paid when Paid" clauses. These clauses state that the general contractor does not have to pay you until the owner pays them. If the owner has financing issues, you are the one who suffers. While these are common, you can sometimes negotiate a limit. For example, you can ask for a clause that requires payment within a specific timeframe regardless of whether the owner has paid the GC.

The Trap of Change Orders

Scope creep is a silent killer of cash flow.

You are on the job site. The site superintendent asks you to move a wall or add extra electrical drops. You want to be helpful and keep the project moving, so you agree to do it. You figure you will do the paperwork later.

The crew does the work. You pay the crew. You pay for the extra materials.

Two weeks later, you finally submit the change order. The GC rejects it because it wasn't approved in writing beforehand, or they delay processing it until the next billing cycle. Now you have floated that cash for 60 days or more.

You must have a rigid process for change orders.

Do not perform the work until the price is agreed upon and signed. Ideally, negotiate terms that require change orders to be billed and paid separately from the main contract draws, with a faster turnaround time. If the change order is significant, ask for payment for materials upfront.

Forecasting vs. Bank Balance Accounting

Too many business owners manage by "bank balance accounting." They log in, check the balance, and make decisions based on that number.

This is dangerous because the bank balance tells you history. It does not tell you the future.

To survive in construction, you need a 13-week cash flow forecast. This is different from a budget. A budget tracks income and expenses. A cash flow forecast tracks the actual timing of the money moving in and out.

It looks like a simple spreadsheet. Across the top are the next 13 weeks. Down the side are your cash sources and uses.

You list exactly when payroll hits. You list when the rent is due. You list the specific date you expect the draw from the Curtis Street project to arrive.

This tool allows you to see the car crash before it happens. You might see that in Week 6, you have three large material bills due and payroll, but your biggest check isn't coming until Week 8.

Now you have a warning. You can call the supplier and ask for an extension. You can push hard to get a draw approved early. You can prepare your line of credit. You are managing the situation rather than reacting to a crisis.

The Role of Financing

There is a stigma in some trades about borrowing money. The "debt is bad" mentality can be harmful when running a capital-intensive business.

Debt used to cover losses is bad. Debt used to bridge a timing gap is a tool.

You should have a line of credit (LOC) established long before you need it. Banks are happy to lend you money when you have cash and show a profit. They are very reluctant to lend you money when you are in a panic because payroll is tomorrow.

Treat your LOC as an emergency valve. It is there to smooth out the weeks between the expense and the income. It is not there to buy a new truck or finance a boat.

If you use the line of credit, your priority must be to pay it down to zero as soon as the draw comes in. The interest you pay is the cost of doing business, but it eats into your margins.

If you cannot get a bank line of credit, invoice factoring is an option, though a more expensive one. Factoring companies will advance you a percentage of your outstanding invoices immediately for a fee. This solves the immediate cash crunch but reduces your overall profit. It should be used sparingly.

Efficient Billing Processes

Sometimes the cash flow bottleneck is in your own office.

If you are slow to send out invoices, you will be slow to get paid. If your invoices are messy or lack the required backup documentation (like lien waivers or insurance certificates), they will be rejected.

A rejected pay application in construction does not just mean a delay of a few days. It often means you miss the monthly cutoff. If you miss the cutoff, you might have to wait an entire month for the next billing cycle.

Your bookkeeping process needs to be precise. You need to know exactly what the specific billing requirements are for every GC you work with. Submit your draws early. Follow up three days later to confirm receipt and that everything is in order.

Do not assume they have it. Do not assume it is correct. Verify it.

Keep Personal and Business Separate

When the pressure is high, the temptation to mix funds is strong. You might think about transferring money from your personal savings to cover the payroll.

Avoid this if at all possible. It muddies the financial picture of the company. It masks the underlying problem. If the business cannot support itself, you need to know that clearly so you can fix the operations or pricing. Subsidizing the company with personal funds only delays the necessary corrections.

Conversely, do not treat the business account as a personal piggy bank when a big check comes in. Just because the account balance is high today does not mean that money is yours. It likely belongs to the lumber yard, the supply house, and your employees.

The Peace of Mind

The construction industry in Colorado is competitive. The margins can be tight. The difference between the companies that survive and the ones that fold is rarely about who can build the best wall. It is about who can manage the flow of money.

You want to get back to focusing on the job site, not the bank website.

By negotiating better terms, staying on top of change orders, and forecasting your cash position weeks in advance, you remove the surprise. You stop sweating the Friday payroll. You gain the clarity to make better decisions.

You move from being rich on paper to being solvent in reality.