The Top 5 Cash Flow Mistakes Contractors Make—and How to Fix Them

Managing cash flow is critical for contractors. A steady flow of cash ensures you can cover project costs, pay employees, and invest in growth. Unfortunately, many contractors fall victim to cash flow mistakes that hinder their financial stability. If you’ve ever found yourself scrambling to pay suppliers or delaying equipment purchases, you’re not alone. Here are the top five cash flow mistakes contractors make—and actionable tips to fix them.

1. Failing to Track Cash Flow Regularly

The Mistake:

Many contractors rely on gut feelings instead of data to assess their cash flow. Without a clear understanding of incoming and outgoing funds, it's easy to run into shortfalls unexpectedly.

The Fix:

• Adopt a cash flow management tool: Use accounting software like QuickBooks or Buildertrend to track your finances in real time.
• Create cash flow forecasts: Regularly forecast your cash flow based on current and upcoming projects. This helps you anticipate shortages and plan accordingly.
• Schedule reviews: Set a weekly or monthly meeting to review cash flow reports and address potential problems early.

2. Underestimating Project Costs

The Mistake:

Bidding too low to win a project can backfire if you haven’t accounted for all costs. Material price increases, labor shortages, or unexpected delays can quickly eat into your profits.

The Fix:

• Develop accurate estimates: Use estimating software like Procore or CoConstruct to build detailed project budgets. Factor in contingencies for unexpected expenses.
• Review historical data: Analyze past projects to identify areas where costs were underestimated and adjust your pricing accordingly.
• Avoid underbidding: While competitive pricing is important, always ensure your bids reflect the true cost of completing the project profitably.

3. Not Collecting Payments Promptly

The Mistake:

Delays in invoicing or failing to enforce payment terms can lead to cash flow gaps. Many contractors hesitate to chase overdue payments, fearing it might strain client relationships.

The Fix:

• Establish clear payment terms: Include specific milestones and due dates in your contracts.
• Automate invoicing: Use tools like FreshBooks or Xero to send invoices automatically and set up reminders for overdue payments.
• Enforce penalties for late payments: Clearly state late payment fees in your contract to encourage clients to pay on time.

4. Overreliance on Credit

The Mistake:

While credit lines can be a helpful tool, relying on them too heavily can lead to mounting interest payments, reducing profitability.

The Fix:

• Use credit strategically: Reserve credit for emergencies or high-return investments, not day-to-day expenses.
• Pay down debt aggressively: Prioritize paying off high-interest debts to free up cash.
• Build a cash reserve: Aim to set aside three to six months’ worth of operating expenses to reduce your reliance on credit.

5. Neglecting to Manage Change Orders

The Mistake:

Change orders are inevitable, but many contractors fail to properly account for them. If you’re doing additional work without adjusting your payment schedule, you’re essentially providing free services.

The Fix:

• Document everything: Require all change orders to be submitted in writing and approved before starting additional work.
• Reassess project budgets: Adjust your cash flow forecast and payment schedule to reflect the new scope of work.
• Communicate with clients: Be transparent about how changes affect the timeline and budget to avoid disputes.

Bonus Tip: Improve Cash Flow with Retention Strategies

Retention payments can be a significant cash flow hurdle. Negotiate with clients to release a portion of retention funds once specific milestones are met. This ensures you’re not waiting until project completion to access funds you've already earned.

Wrapping Up

Cash flow issues can derail even the most promising contracting businesses. By addressing these common mistakes, you can create a healthier, more predictable financial system for your company. Remember: consistent tracking, clear communication, and strategic planning are your best allies in improving cash flow.

Are you ready to take control of your cash flow? Implement these fixes today, and watch your business thrive. If you need more tailored advice, contact me, Caryn Silvius directly or reach out to my team at Olive Branch Bookkeeping, Inc for personalized financial management solutions for your construction business.