Cash Needs When Bidding Bigger Construction Jobs

Moving up from $50,000 jobs to $500,000 ones is the goal of many contractors, and also the point where they find out how much cash a larger project actually consumes. The contract may be profitable on paper, but between mobilization, materials, subcontractors, bonding and a payment schedule that lags your costs, you can be well out of pocket before the first big check clears.

Understanding those cash needs before you bid, rather than after you win, helps you price correctly, line up funding in time and avoid taking a job you cannot afford to finish. Here is what to plan for.

Bonding: bid, performance and payment bonds

Many public projects, and some private ones, require surety bonds. A bid bond assures the owner that you will sign the contract at your bid price if you win. A performance bond assures completion of the work, and a payment bond assures that your subs and suppliers get paid. Requirements vary by owner and jurisdiction, so read the solicitation closely.

A bond is not insurance for you. It is a credit instrument from a surety company, which evaluates your financials, experience, work in progress and character, and which may require personal indemnity from owners. Capacity is often tied to your working capital and net worth, so strong financial statements, ideally prepared by a CPA, matter. Premiums are generally a percentage of contract value and vary by surety and risk, so get a quote from a surety agent.

Mobilization: costs that arrive before income

Mobilization is everything needed to get the job started: permits, insurance certificates, temporary facilities, dumpsters, site safety, equipment transport, initial materials and the first payroll. Some contracts include a mobilization line item in the schedule of values, which helps, but not every owner allows front-loading.

Say a hypothetical $600,000 job requires $60,000 in mobilization and early materials before the first pay application is even submitted. If you then wait 30 to 45 days for approval and payment, that amount is out in front of you the whole time.

• Permit fees, insurance endorsements and bond premiums.
• Deposits on long-lead materials and equipment rentals.
• Field office, fencing, signage and temporary utilities.
• Initial payroll for crews and superintendent.
• Subcontractor mobilizations that expect payment promptly.

Do the payment-timing math

Build a month-by-month cash-flow schedule for the job before bidding. Your costs follow the construction schedule, but income follows pay applications, approvals, payment terms and retainage. Often the cumulative cash position goes negative for several months, and the lowest point is how much working capital the job truly needs.

That lowest point is the number to compare with your available cash and credit. If the job needs $120,000 at its peak and you have $40,000 in reserves, you need a plan for the difference, or you should reduce risk by negotiating terms, partnering, or bidding smaller work.

Retainage, change orders and payment terms

Retainage withholds part of each payment, commonly around ten percent but set by contract, until completion. On a big job that is a large balance of earned money you cannot touch. Change orders add risk, since extra work done before approval may not be paid on time, or at all.

Read the payment clauses carefully: pay-when-paid or pay-if-paid language, time limits for payment after approval, and notice requirements for claims. Rules differ by state, particularly on public work and lien rights, so involve a construction attorney for large contracts.

Price in the cost of money and the cost of risk

Many contractors forget to include financing and bonding costs when they bid, which turns an apparent 12 percent margin into a smaller one. Add bond premiums, the cost of any borrowed working capital, additional insurance, extra overhead for project management, and a contingency for delays and unforeseen conditions.

Also look at your capacity, not just your cash. A larger job can pull your best people away from existing work, hurting those projects. Ask whether your team, equipment and supplier relationships can support a job of this size without breaking the rest of the business.

Subcontractor and supplier terms are another place to build cushion. If you can negotiate pay-when-paid or longer terms with key subs, and early-order discounts or net-30 accounts with suppliers, the gap between your outflows and inflows narrows. Be careful, though: some states restrict pay-if-paid language, and a sub who is paid late may slow down, lien the project or walk off. Treat those relationships as part of your capacity. A bigger job should not be won at the cost of the reputation that got you invited to bid in the first place.

Lining up funding before you bid

The best time to arrange working capital is before the award, when you have time to compare options. Contractors commonly use credit lines, equipment financing for needed machinery, invoice-based solutions on approved pay applications where available, and short-term working capital. The right choice depends on the contract, who the payer is and how the repayment lines up with when you are paid.

Fidelity Funding is a broker that connects contractors with funding partners. A short application and a soft credit pull for the initial review let a funding specialist look at your revenue and discuss structures that could fit. Amounts, terms and timing vary by partner and underwriting, and nothing is guaranteed. Bring your job cash-flow schedule and the contract payment terms, since those show a specialist how and when repayment could be supported.

This article is for general information only and isn’t financial, legal or tax advice. Funding approval, amounts and terms are set by funding partners and depend on underwriting.