The 45-Day Pay Cycle That Outruns the Line of Credit
Your firm holds a $2,400,000 fixed-price contract for a 14,000 sq ft clinic. The owner's lender will not release a draw without lien waivers from every subcontractor and supplier, and the owner pays on a 45-day cycle. You bill $300,000 on the 25th of each month; retainage is 10%. Subcontractors invoice you Net 30, the ready-mix supplier is Net 15, and payroll of about $165,000 per month goes out weekly. Job costs are running roughly $255,000 per month, so the job is grossing about 15%. You are now four months in. There are no approved change orders, but $130,000 of owner-directed added scope is underway on a signed field directive with no price agreed. Last week the owner's PM verbally promised to "true up" retainage when the job hits 50% complete. Your $250,000 line of credit is $40,000 drawn.
1. Quantify the cash exposure you are carrying right now and determine whether the line of credit covers it. Show your components.
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Break the exposure into two pieces rather than looking at one month's billing.
1. Working capital trapped in the billing lag. Cash arrives 45 days after you bill, but you pay subs at 30 days and suppliers at 15 days. That means roughly 1.5 months of job cost is always out the door before the matching receivable lands: 1.5 x $255,000 = $382,500.
2. Retainage. Billed to date is 4 x $300,000 = $1,200,000. At 10%, $120,000 is being withheld and will not come back until substantial completion and the lender's final waiver process.
Total exposure ≈ $502,500.
Available credit is $250,000 - $40,000 = $210,000. You are roughly $290,000 short of your own exposure, and the gap grows by about $30,000 of new retainage every month you keep billing the same way. A 15% gross margin on a job that does not close for many more months will not fund that hole.
Conclusion: the LOC is not a solution, it is a delaying tactic. The job is profitable on paper and still capable of taking the company down.
2. The PM's retainage "true-up" promise and the unpriced $130,000 field directive - how much weight should each carry in your planning, and what do you do this week?
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Neither one is bankable as it stands, but they fail for different reasons.
Retainage promise. It is oral, made by an agent (the PM) whose authority to modify payment terms is almost certainly not established in the contract, and it is contradicted by the lender's written draw requirements. The lender, not the PM, controls the release. Treat retainage as held to completion. If you want relief, get a written, lender-acknowledged reduction - typically a retainage reduction to 5% at 50% completion with a satisfactory schedule update - signed by someone with actual authority and copied to the lender.
Field directive. This is the stronger position because you have it in writing and the work is being performed. But a signed directive authorizes scope, not price. Without an agreed price you are financing $130,000 of owner-directed work at your own risk, and worse, you may be absorbing its cost while the owner argues later that it was included in the base contract.
Actions this week: (a) submit a formal change order with a detailed price and a stated date after which the price is withdrawn or subject to remobilization cost; (b) stop performing added scope beyond the next increment until priced, or notify in writing that you are proceeding on a cost-plus-reimbursable basis with a not-to-exceed number; (c) request a written retainage reduction tied to 50% completion; (d) update the schedule of values so the added scope is billed as it is installed, not lumped at the end.
3. Payment slows to 60+ days and the owner's PM stops returning calls, while the lender is still demanding waivers. What is your sequence of moves, and what must you avoid?
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Avoid first: signing any further unconditional lien waiver, or a waiver that covers work for which you have not been paid. A waiver given in exchange for a partial draw should be conditioned on receipt of cleared funds and limited to the amount actually received. Also avoid stopping work without the contractual notice - an unjustified walk-off converts you from creditor to defendant.
Sequence:
- Paper the default. Send written notice of nonpayment under the contract's notice provision, state the amount and days past due, and demand the lender's draw documentation.
- Preserve lien rights immediately. Minnesota lien claims run on a short clock measured from last furnishing, not from when you get around to demanding money. Calendar the recording and service deadlines now, and send pre-lien/preliminary notices to the owner and lender if they have not already gone out.
- Contact the lender directly. Lenders on a project with a recorded mortgage have an interest in knowing the contractor is unpaid; a lender's title company will require lien waivers at closing and will pressure the owner.
- Suspend on notice, not unilaterally. Give the contractual cure period, then suspend for nonpayment in writing, documenting demobilization and standby costs.
- Preserve the damages trail. Track extended overhead, financing cost on the LOC, and escalation. These are recoverable only if contemporaneously documented.
If a payment bond exists, notify the surety early - bond notice deadlines are often shorter than lien deadlines.