Every year, construction leaders inevitably run into a scenario where payroll or invoices are due, but cash flow is too tight to comfortably pay them. This uncertainty is all too common in the construction industry, whether you’re a $10M or a $100M sub. However, you can take steps to prevent this from happening.
Josh Luebker, construction consultant and fractional CFO, offers his suggestions on how to do just that.
Table of Contents
1. Diversify Your Working Capital Options
Luebker strongly recommends building a trove of working capital options to have at your disposal. Without these resources, subcontractors often miss out on valuable projects, without realizing a lack of capital was the root cause.
He suggests aiming for:
- 6 months of working capital reserves
- Multiple lines of credit
- Strategic use of credit cards
- Negotiated vendor and supplier terms
- Partnerships with industry-specific financial service providers like Billd
“Cash is king,” Luebker reminds us. “Regardless of estimated profits, you can only stay in business with strong cash flow.” Capital limitations can become a massive problem that has put countless subs out of business. So plan now and have resources in place before you need to prequalify for larger projects—which leads into his next recommendation.
2. Embrace and Be Proactive About Credit
Subcontractors are often apprehensive about credit, not wanting to dig themselves into a hole they can’t get out of. But, when used responsibly, credit is a tremendous asset that can help your business find and keep financial stability.
That said, don’t wait until you need it to apply. Luebker strongly encourages subcontractors to actively apply for new credit well before it’s needed. This way, they have time to establish good payment history, raise their limits, and won’t be scrambling to secure credit during high-pressure scenarios, like when a high-paying job is on the line.
“The reason your limits start low is because of risk to lenders,” he explains. Subcontractors can’t prove credit-worthiness through their WIP alone, and they’re seen as uniquely risky by banks due to the unpredictability of the industry. But with just six months of timely payments and good credit habits, subs can qualify for better rates and higher limits, potentially shifting their financial position entirely. Higher paying jobs become more within reach, and cash flow is no longer such a limiting factor.
3. Document Like Your Profit Depends on It
Proper documentation can mean the difference between making a profit or taking a loss. Luebker shares a cautionary tale of a company that lost its entire annual profit due to poor documentation practices during a change order. Using airtight documentation processes, including photos of materials, damage reports, receipts, signed time and material forms, and emails obtaining permissions and sign-offs, can protect your cash flow and even prevent you from losing money on a project.
But this doesn’t just depend on you. You need to reinforce the need for documentation among your staff. Treat the need for documentation like a cultural principle. Ensure everyone from office staff to laborers are briefed on how documentation safeguards profit, and can’t be compromised on.
Plan for the Worst, Hope for the Best
While it may seem like you’re anticipating the worst behavior from your customers (i.e. shorting you on change orders, taking ages to pay), Luebker insists that this kind of thinking is simply self-preservation. Planning for the worst-case scenario in client relationships doesn’t mean that those situations will come to pass, but if they do, you’ll be prepared.
By adopting these strategies and maintaining, above all, a proactive financial mindset, subcontractors can navigate the industry’s built-in uncertainty and position themselves for long-term, sustainable growth.
To hear more of Luebker’s advice, watch and share the full video above.
