Cash Flow Challenges in the Construction Industry

  • Editorial Team
  • News
  • 26 September 2023

In our industry, like many others, maintaining a stable cash flow is quite important. Construction businesses actually rely on cash to initiate new projects, sustain ongoing ones, cover labor and material costs, and even manage different expenses. A single instance of late client payments, excess inventory, or unforeseen price hikes in materials can jeopardize a construction company’s financial health. You should closely monitor and manage cash flow, if your construction firms wants to anticipate needs, identify potential issues, and foster sustainable growth. This makes it very, very important for professionals in the construction industry to prioritize cash flow management.

Calculating Cash Flow in Construction

Cash flow is typically assessed by deducting cash inflows from cash outflows. Accountants classify cash inflows as “sources of cash” and cash outflows as “uses of cash.” These inflows and outflows are categorized into three main groups. The groups are, cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.

Operating Cash Flow

Operating cash flow represents the difference between income from clients and the expenses incurred for running operations, including labor, construction equipment, supplies, and rent. This metric focuses on a company’s core activities, such as the sale of goods or services, excluding non cash costs like stock based compensation and depreciation. The formula for calculating operating cash flow is;

Operating Cash Flow = Income from Clients – Operating Expenses

Investment Cash Flow

Investment cash flow reflects funds allocated for long term investments, like purchasing or selling property, heavy equipment, stocks, bonds, or acquiring other companies. This category provides insights into the “quality” of cash flow by determining if cash transfers are routine or irregular. For instance, selling outdated used construction equipment may bring in substantial cash, but is it the best way to compensate employees? The formula for investment cash flow is;

Investment Cash Flow = Funds Spent on Investments – Funds Received from Investments

Financing Cash Flow

Financing cash flow includes any financial transactions involving owners, investors, and creditors through debt, stock, and dividends. Analyzing financing cash outflows can reveal opportunities for loans with favorable terms, while cash inflows from debt issuance can help address short-term liquidity shortages. The formula for financing cash flow is;

Financing Cash Flow = Funds Received from Financing – Funds Spent on Financing

Performing a Cash Flow Analysis

A comprehensive cash flow analysis examines all transactions presented in a cash flow statement to determine a business’s financial capacity to cover expenses. This analysis typically begins with the creation of a cash flow statement, which details specific information for each of the three cash flow categories, as in operating, investment, and financing. Accounting software is very often used for this purpose. Now, by adding the results of these three categories to the initial cash position for the period, a company can assess its ending cash balance, gain better insights into its financial status, and even make operational adjustments for the future if necessary.

Common Cash Flow Challenges in Construction

Construction companies rely on consistent and positive cash flow to sustain operations, compensate employees, and support growth. Insufficient cash flow from one project can have a cascading effect on others. Several factors can contribute to cash flow challenges in construction, and understanding these issues is what makes effective management possible.

Overpaying Bills

Paying bills as soon as they arrive may deplete a company’s available cash, potentially leading to negative cash flow. Delaying payments until near the bill’s due date allows more flexibility to invest in the business or allocate funds where needed.

Lack of Upfront Payments

Construction businesses often incur substantial expenses on materials and heavy equipment before a project begins. Requesting upfront payments from clients can help offset these initial procurement costs.

Delayed Invoicing

Late invoicing for services rendered prolongs the time it takes to receive payment, affecting cash flow. Implementing progress invoicing, where clients are billed for work completed at different stages, can mitigate this issue.

Slow-Paying Clients

Clients with extended payment terms can strain a contractor’s cash flow. The further a company is down the payment chain (e.g., a subcontractor or supplier), the longer it must wait to receive payment, impacting cash flow.

Excessive Inventory

Stockpiling inventory depletes cash reserves immediately and incurs carrying costs. Purchasing only what is needed at the moment ensures a more balanced cash flow.

Joint Ventures

Joint ventures can involve pooling resources and expertise for specific projects, but they carry risks if one partner fails to meet obligations or exits the venture. Clear operating agreements should address potential contingencies, including timing of cash payments and loss funding.


Disputes in construction projects, leading to non payment or legal battles, negatively affect cash flow. Well documented contracts and dispute resolution procedures can help mitigate this risk.

Accounts Receivable and Accounts Payable

Mismanagement of accounts receivable and accounts payable timing can disrupt cash flow. Proper coordination ensures that bills are paid after receiving payment from clients.


Clients withholding a portion of payment until project completion can affect cash flow. Adequate budgeting is what is needed in order to handle retainage.

Floating Projects

Projects with flexible timelines (float) can challenge cash flow predictability. Delayed project activities delay billing and payment, affecting the cash flow.

Project Fronting

Front loading costs for materials and labor without immediate reimbursement can strain cash flow. Budgeting and client payment timelines must account for this practice.

Change Order Management

Insufficient management of change orders, including documentation and billing, can result in cash flow disruptions. A well defined change order process is also a must.

In the construction industry, effective cash flow management is needed for success. Understanding, calculating, and navigating the complexities of cash flow can help construction businesses to thrive despite different challenges.