$900K Award on a $250K Line of Credit
You own a general contracting firm with $250,000 available on a line of credit - your only source of liquidity, and the bank reviews the balance every quarter. A repeat client awards you a $900,000, six-month interior renovation. Terms: bill monthly by the 25th; 10% retainage, dropping to 5% once the project passes 50% complete; the owner pays 45 days after billing, which in practice means cash arrives two months after the work month; all project costs are paid in the month incurred; cost of work runs 85% of gross billings. Anticipated gross billings: M1 $150,000; M2 $200,000; M3 $200,000; M4 $180,000; M5 $120,000; M6 $50,000. Retainage is released 30 days after final acceptance. Your bookkeeper flags the exposure before you sign.
1. Compute the peak working-capital requirement month by month. Does the line of credit cover it?
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Retainage: 10% on M1–M3 (the project crosses 50%, $450,000, during M3), 5% on M4–M6.
| Month | Gross | Retainage | Net billing | Cost (85%) |
|---|---|---|---|---|
| M1 | 150,000 | 15,000 | 135,000 | 127,500 |
| M2 | 200,000 | 20,000 | 180,000 | 170,000 |
| M3 | 200,000 | 20,000 | 180,000 | 170,000 |
| M4 | 180,000 | 9,000 | 171,000 | 153,000 |
| M5 | 120,000 | 6,000 | 114,000 | 102,000 |
| M6 | 50,000 | 2,500 | 47,500 | 42,500 |
Receipts lag two months: M3 collects M1's $135,000, M4 collects $180,000, and so on.
Cumulative cash: M1 −127,500; M2 −297,500; M3 −332,500; M4 −305,500; M5 −227,500; M6 −99,000; M7 +15,000; M8 +62,500, plus $72,500 retainage later.
Peak deficit is $332,500 at the end of M3 - about $82,500 beyond the line. The job is profitable but unfundable as written. The killer is the combination of a two-month collection lag and the front-loaded cost curve, not the retainage alone.
2. Rank three realistic mitigations and explain why each works on the cash curve rather than just on paper.
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- Shorten the collection cycle. Weekly or biweekly billing with a 20-day pay cycle pulls roughly $150,000–$180,000 of receipts forward by 3–4 weeks, which is exactly the size of the gap. This is the highest-value move because it attacks the lag directly and costs nothing but paperwork discipline.
- Negotiate a mobilization payment or advance of 10% against the first billing. $90,000 up front offsets M1 and M2, the two months with no receipts at all. Owners resist this; offer a matching reduction in later billings and a bond if required.
- Reduce retainage to 5% throughout, or post a retainage bond in lieu of retainage. Saves about $27,500 of held cash during M1–M3.
Stretch subcontractor payment terms only as far as prompt-pay statutes allow - in many states paying subs later than the owner pays you is itself a violation, and it converts a financing problem into a lien problem. Front-loading the schedule of values to manufacture cash is a defect, not a strategy: it invites a fraudulent-billing allegation and a surety claim.
3. The owner counters: 5% retainage throughout, but payment at 60 days and a pay-when-paid clause. Accept, counter, or walk?
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Run the trade. Dropping retainage to 5% throughout frees about $27,500 during M1–M3. Moving from 45 to 60 days pushes every receipt out roughly half a month; with average net monthly billings near $154,000 that is a ~$75,000 deeper hole - the owner's offer is net negative by roughly $45,000–$50,000 and deepens the exact month-three trough that already breaks the LOC.
Pay-when-paid does not fix it either: it shifts risk to your subs and may be unenforceable or illegal if the clause conditions payment on owner payment beyond a statutory period. It also does nothing for your own labor and material costs, which are paid in the month incurred.
Counter. Keep 5% retainage but hold the 45-day clock, or take 60 days with a 10% mobilization payment and biweekly billing. If the owner won't move on the payment clock, take a smaller scope or a phased start - do not sign a contract whose cash curve exceeds your liquidity, because the first late payment then cascades into missed payroll and a bonded default.