Covering Payroll With the Developer's Money
Summit Ridge Builders holds a Nevada general building license with a $3,000,000 monetary limit and bills about $4.2M a year. Its latest balance sheet shows current assets of $1,350,000 - including $600,000 of receivables, of which $180,000 is more than 90 days old and disputed by a public owner - against current liabilities of $1,150,000, including a $310,000 line of credit due in 60 days. Backlog is $1.9M. A developer offers a $2,100,000 office tenant improvement running 270 days, with 5% retainage, payment 45 days after invoice, and $350,000 of mobilization and submittals required in the first 30 days. Subcontractors are demanding weekly payment after being paid slowly last quarter.
1. Compute working capital, adjust it for quality, and decide whether Summit Ridge can carry the $2.1M contract on its own balance sheet.
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Book working capital: $1,350,000 − $1,150,000 = $200,000.
Quality adjustment: strip the $180,000 receivable that is 90+ days and disputed, because a public owner in dispute is not a reliable 60-day collection. Adjusted working capital ≈ $20,000, roughly 1% of annual volume. That is not a cushion; it is a coincidence.
Cash demand of the new job:
- Billings ≈ $2,100,000 ÷ 9 months = $233,000/month.
- Cash out the door (labor, material, subs, equipment) runs 80–90% of billing ≈ $195,000–$210,000/month.
- With 45-day payment terms, month-one and part of month-two costs are funded by the contractor before any check arrives. Peak unrecovered cost ≈ $525,000–$600,000, plus 5% retainage (~$105,000) held to the end.
- Mobilization/submittals of $350,000 in the first 30 days are paid before they generate a dollar of billing.
Conclusion: peak need is roughly $650,000–$750,000 against $20,000 of usable working capital and a credit line that itself matures in 60 days. The company cannot self-fund this job. The only honest answers are to renegotiate terms (weekly or biweekly billing, 15-day pay, retainage reduction or early release), obtain committed credit before signing, or decline. What it must not do is fund the new job's mobilization out of retainage owed on the backlog - diverting project funds is exactly the conduct that gets a license restricted.
2. The president says: "Our license is $3M and the job is only $2.1M, so the Board has no issue." Evaluate that reasoning.
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He is answering the wrong question. The monetary limit is a per-contract ceiling set from demonstrated financial capacity; it is not a statement that the company is currently financially responsible for that amount.
- On the ceiling alone, a $2.1M contract fits under a $3M limit, so the license is not being exceeded by this job.
- But the limit was established from a financial statement that no longer describes the company. Adjusted working capital of roughly $20,000, a receding credit line, and a $1.9M backlog that already consumes the balance sheet are material changes. Nevada's licensing framework ties the limit to working capital and requires the licensee to remain financially responsible; when that changes, the Board can restrict, suspend, or require a new financial statement.
- Independently, a contractor that cannot pay subs and suppliers is at risk of license complaints, bond claims, and liens regardless of what the limit says.
The right move is to treat the $3M limit as a maximum, not a target, and to underwrite each award against actual liquidity.
3. Name the specific controls Summit Ridge should put in place before signing, and the one control most contractors skip.
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- 13-week rolling cash flow by job, not by company - including retainage as a cash item and subcontractor payment lags.
- Payment terms in writing before mobilization: weekly or biweekly invoicing, 15-day review period, retainage release schedule, and a pay-if-paid provision that is enforceable and disclosed to subs.
- Committed credit, not a term sheet: an extended or replaced line of credit before the existing one matures in 60 days.
- Collect or write off the $180,000 disputed receivable - a collection plan with a date certain, and a decision to reserve it if it does not resolve.
- Sequenced mobilization negotiated with the developer so the $350,000 is spread over 60 days rather than 30.
- Subcontractor payment discipline - weekly pay tied to approved work, joint checks on material suppliers, and lien waivers at each draw.
The control most often skipped: a go/no-go gate with a documented decision. Contractors sign because the backlog feels like safety. The gate should be a written test - committed liquidity must exceed peak cash need by a margin - and no signature until it passes.