Cash-Flow Squeeze on a $180,000 Retail Center Re-Roof
Gulf Coast Roofing & Sheet Metal is awarded a $180,000 re-roof of a 30,000 ft² retail center. The contract provides 5% mobilization, monthly progress billings, 10% retainage, and payment net 45 days from approval. The supplier requires a 50% deposit with the material order and the balance COD. Payroll runs $18,000 per week, and the crew will be on site four weeks in month 1. Equipment rental is $5,000 for month 1. The first month's billing will be $90,000; materials for that billing are $55,000. Gulf Coast has $8,000 cash on hand and a $60,000 line of credit with only $15,000 currently available. The owner's representative has already hinted that the first billing may be approved late because of a missing lien waiver form.
1. Calculate the month-1 peak cash requirement and determine whether the available cash and line of credit are sufficient.
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Month-1 outflows: material deposit is 50% of $55,000 = $27,500; COD balance is $27,500; payroll is $18,000 x 4 = $72,000; equipment is $5,000. Total outflows = $132,000. Month-1 inflows: mobilization is 5% of $180,000 = $9,000, probably received around day 30. The $90,000 progress billing less 10% retainage ($9,000) nets $81,000, but on net 45 terms after approval it may not arrive until day 75 or later. Available liquidity is $8,000 cash plus $15,000 on the line = $23,000. Before the first progress payment, the gap is roughly $132,000 - $9,000 - $23,000 = $100,000. Even if the $81,000 payment arrives on time, the company must carry the work for weeks. The $15,000 available credit is nowhere near enough. The project should not start until the funding gap is closed or the payment terms are changed.
2. Recommend three specific actions Gulf Coast should take before mobilizing, with the financial reasoning for each.
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First, negotiate supplier terms: ask for net 30 on the material balance or a joint-check arrangement with the owner. Converting the $27,500 COD balance to 30-day terms reduces the peak gap by $27,500 and aligns the supplier due date closer to the first progress payment. Second, bill and collect mobilization immediately and ask for a signed, dated progress billing schedule; if the owner will not pay mobilization up front, request a larger first billing or a deposit. The $9,000 mobilization is only about 7% of month-1 outflows and does not solve the problem. Third, reduce or bond the retainage. At 10%, the project will hold $18,000 at completion, and slow approval adds 45 days or more of carry. A retainage bond or a negotiated reduction to 5% frees cash and lowers financing cost. The company should also correct the lien waiver paperwork before the first billing, because a late approval turns a manageable gap into a default. Do not use the line of credit as the only plan; it is already nearly exhausted.
3. If the owner insists on the 10% retainage and net-45 terms, how should Gulf Coast evaluate whether the project is still worth taking?
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The decision is not just profit on the $180,000 contract; it is profit compared with the cost and risk of financing the job. Gulf Coast should build a simple cash-flow forecast by week, showing material deposits, payroll, equipment, billings, retainage, and expected payment lags. It should add interest on the line of credit, the cost of any emergency financing, and a contingency for late approval. If the job's gross margin does not cover those financing costs plus a reasonable risk margin, the contract should be declined or repriced. The company should also test downside cases: first payment at day 90 instead of day 75, a 10% material price increase, and one week of weather delay. A project that requires nearly all available credit and leaves no reserve for payroll or warranty work is a solvency risk, even if the bid looks profitable on paper. A better approach is to propose a shorter payment cycle, partial retainage release at substantial completion, or a different project.