THE 7 WEEK CFO SERIES ON CONSTRUCTION

WEEK ONE: Why Construction Companies Run Out of Cash, Even When Business is Booming

Your construction company can be profitable, busy, and growing, but still be heading toward a cash crunch. The crews are working. The backlog is strong. Revenue is up. The income statement may even show a strong profit. But the bank account tells a different story.

The reason is simple: profit and cash flow are not the same thing.

Profit is what is left after expenses on a financial statement. Cash flow is the actual movement of money in and out of the business. In construction, those two numbers can be very different because of progress billing, holdbacks, payroll timing, supplier terms, tax remittances, equipment costs, and slow collections.

In plain terms, construction companies often have a difficult cash conversion cycle. They spend money to complete work long before all of the related cash is collected.

A construction company does not usually fail because it has no work. It often gets into trouble because the work it has consumes more cash than expected before the cash comes back in.

BY THE NUMBERS — CANADIAN CONSTRUCTION

THE STATUTORY HOLDBACK PROBLEM

In construction, part of the money you earn may not be available to you right away.

Across Canada, holdback rules are generally governed by provincial construction lien legislation or similar legislation. The details vary by province, but the basic issue is the same: a portion of the contract value may be withheld for a period of time to protect lien rights and payment obligations down the construction chain.

In many provinces, statutory holdback is commonly 10%. In Manitoba, the regular statutory holdback is 7.5%. The timing and release rules also vary by province.

For example:

• In Ontario, holdback is commonly tied to a 10% basic holdback framework, with lien and release timing governed by Ontario’s Construction Act.

• In British Columbia, where a certificate of completion is issued, the holdback period generally expires 55 days after that certificate is issued.

• In Manitoba, the regular statutory holdback is 7.5% of the contract price, or the value of work and materials supplied if there is no contract price.

• In Alberta, the standard holdback period is generally 60 days, with certain exceptions, including some oil and gas and concrete-related work.

The specific rules matter, and companies should get legal advice for their own province and contract situation. But from a cash-flow perspective, the issue is clear:

You can earn revenue that is not immediately collectible.

On a $2 million contract in a province with a 10% holdback, that can mean $200,000 is locked up for a period of time. In Manitoba, the regular statutory holdback would generally be lower at 7.5%, but the impact is still significant.

Now multiply that across three or four active projects. A company can have hundreds of thousands of dollars in earned revenue sitting in holdbacks while still having to pay wages, suppliers, subcontractors, equipment costs, insurance, rent, fuel, and tax obligations.

PROGRESS BILLING CREATES TIMING GAPS

Progress billing helps construction companies get paid as work is completed, but it doesn't eliminate cash-flow risk.

The company may complete work in one month, submit an invoice at month-end, wait for approval, deal with deficiencies or documentation requests, and then wait for payment terms to run. Even when everything goes well, there can be a long delay between doing the work and collecting the cash.

Payroll does not wait for a customer to approve a progress draw. Source deductions do not wait for holdback release. Crews still need to be paid even if a project owner is slow to process an invoice.

If payroll is weekly or biweekly, but customers pay 30, 45, 60, or more days after billing, the company is effectively financing labour for the customer.

This is why strong billing processes are not administrative details. They are financial controls.

PROMPT PAYMENT HELPS, BUT IT DOESN'T ELIMINATE CASH-FLOW RISK

Prompt payment legislation has been introduced in various jurisdictions to help improve payment timelines in construction.

For example, federal prompt payment rules for federal construction work generally require payment within 28 days after a proper invoice, with payments moving down the subcontracting chain within 7-day intervals.

That is helpful. But prompt payment legislation doesn't eliminate the need for strong internal cash-flow management.

Companies still need to submit proper invoices, meet documentation requirements, manage disputes, track collections, monitor holdbacks, and forecast cash needs.

TAX REMITTANCES ARE NOT WORKING CAPITAL

One of the most dangerous cash-flow mistakes is using tax money as working capital.

Payroll source deductions, GST/HST, and other tax remittances are not ordinary cash. They are amounts collected or withheld on behalf of government authorities.

The problem is that those funds often sit in the bank account temporarily, which can create a false sense of available cash. But that money is not really available.

Late remittances can lead to penalties, interest, collection pressure, and personal exposure for directors in some cases. CRA can also treat certain amounts, such as payroll deductions and GST/HST, as deemed trust amounts.

In plain English:

Do not use tax remittance money to plug operating cash-flow gaps.

THE REAL PROBLEM: NO CASH-FLOW FORECAST

Many construction companies run into cash problems because they don't have a forward-looking cash-flow forecast.

They may have financial statements. They may have a backlog report. They may have a bank balance. But they don't have a clear view of what cash will look like over the next 4, 8, 12, or 16 weeks.

A cash-flow forecast should help management see:

• Expected customer receipts

• Payroll requirements

• Supplier and subcontractor payments

• Tax remittance dates

• Holdback releases

• Cash shortfalls before they happen

Without this, owners are often making decisions based on the current bank balance. That's dangerous because the bank balance is only a snapshot. It doesn't show what bills are coming due, what payroll is approaching, what invoices are delayed, or what projects are about to consume cash.

FINANCING SHOULD BE PLANNED BEFORE THE CRISIS

Construction companies often wait too long to arrange financing. Financing is much easier to arrange when the company can show good reporting, strong job costing, clean books, reliable forecasts, and a clear plan.

Depending on the business, financing tools may include:

Operating Line of Credit

A line of credit can help bridge timing gaps between paying costs and collecting receivables. The key is to use it as a working capital tool, not as a permanent substitute for profitability.

BDC Financing

BDC may provide working capital loans, equipment financing, and growth capital for qualifying Canadian businesses.

EDC Support

Export Development Canada may be relevant for companies doing cross-border work or serving foreign customers. Depending on the situation, EDC support may help manage payment risk or improve financing options tied to export-related receivables.

SR&ED Tax Credits

Some construction companies involved in innovative building methods, materials testing, process development, or technical experimentation may qualify for Scientific Research and Experimental Development tax credits. The value and refundability of SR&ED credits depend on the company’s circumstances, so this should be reviewed carefully with a qualified advisor.

Financing is not a substitute for good cash management. But when used properly, it can help support growth, protect working capital, and reduce the risk of a temporary cash-flow gap becoming a serious business problem.

THE BOTTOM LINE

A construction company can be busy, profitable, and growing but still run out of cash. That doesn't mean the business is failing. It means the business needs better cash-flow visibility, stronger financial controls, and more disciplined planning.

In construction, revenue doesn't automatically equal cash. Profit doesn't automatically equal liquidity. A full backlog doesn't automatically mean financial strength.

The companies that manage cash well understand the timing of their business. They know when money is coming in, when money is going out, what is tied up in holdbacks, what is stuck in receivables, what is sitting in work in progress, and what obligations are coming due.

That visibility changes everything...

Ready to map your cash flow cycle?

Mastery Fractional CFO Services helps construction companies build better cash-flow forecasting, job costing, reporting, and financial decision-making systems so owners can grow with more confidence and fewer surprises.

→  Book a free consultation at masterycfo.com/contactus

Next week:

Your Job Costing Is Lying to You: How to Find the Profit Killers on Every Project

You bid 18% margin. You made 6%. Next week we break down exactly where the difference goes, and how to stop it from happening on your next Canadian project.

Note: Construction lien, holdback, and prompt payment rules vary by province, project type, and contract situation. This article is general information only and is not legal advice. Consult a qualified construction lawyer for advice specific to your project or jurisdiction.

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