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Account for construction cash by date, not by revenue or invoice value alone. A useful forecast carries opening cash forward, adds only receipts you reasonably expect to collect, subtracts payroll, subcontractors, materials, equipment, taxes and other project costs, and shows retainage, deposits, earned-but-unbilled work, and disputed change orders as separate lines. Keep three questions separate: when cash moves, when the contract gives you a right to bill and collect, and when accounting standards let you recognize revenue.
That separation prevents a profitable project from appearing liquid when cash is trapped in retainage, an advance has not yet been earned, or a client is late. The framework below is for U.S. contractors and project managers; contract language, customer type, jurisdiction and accounting basis can change the answer.
Start with a dated project cash forecast
Build the forecast around the date money is expected to enter or leave the bank. For every week or month, calculate:
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Use a dated schedule rather than a single project-level total. Record the contractual due date and your realistic expected collection date in different columns. If a client normally pays 15 days after the stated due date, the forecast should reflect that behavior while preserving the legal due date for follow-up.
Receipts to show separately
- Progress invoices submitted, with invoice date, contractual due date and expected collection date.
- Retainage withheld from each application, plus the milestone, acceptance event or other condition that could release it.
- Customer deposits or advances, with the work or materials they are intended to fund.
- Earned-but-unbilled work, if the contract and accounting policy allow recognition before billing; do not treat it as a scheduled cash receipt until a billable right and collection date exist.
- Approved change orders that are billable and expected to be paid.
- Pending, disputed or unpriced changes, shown as exposure rather than collected cash.
Outflows to forecast
- Payroll, payroll taxes and benefits for field and project staff.
- Subcontractor applications, retainage you withhold from lower-tier parties, and their payment dates.
- Materials, delivery charges, equipment rentals, fuel and repairs.
- Insurance, permits, bonding, project-specific taxes and other cash costs.
- Corporate allocations or debt service only when they are actually funded by the project cash account.
Update the schedule whenever an approval, inspection, pay application, change-order decision or customer promise moves. Maintain at least a base case and a delayed-collection case so management can see the earliest date a cash deficit appears.
How retainage changes the cash curve
Retainage is money withheld from a progress payment to encourage acceptable completion or performance. The Associated General Contractors of America (AGC) Airport Owners’ Guide to Project Delivery Systems, Third Edition (2022), reports a usual range of 5%–10% of contract value — Associated General Contractors of America, 2022. That is an industry description in that guide, not a statutory cap, a universal rate or a promise that every trade or project uses the same percentage.
The contract may apply retainage to each pay application, reduce it after a milestone, or release it only after substantial completion, punch-list work, acceptance, lien waivers or another stated event. Some states mandate or limit retainage on particular public projects. Private contracts can use different terms, and the owner may have discretion where the contract permits it. Confirm the project’s governing law and payment clause instead of importing a percentage or release date from another job.
Illustrative arithmetic
Suppose a contract permits 10% retainage and a progress billing is $100,000. Before other deductions, the cash forecast shows a $90,000 receipt and $10,000 withheld as a potential later receipt. The $10,000 is not scheduled for a particular date until the contract identifies the release condition and you estimate when that condition will be met. This is arithmetic illustration only; it is not a sourced standard or a promised release timeline.
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Why the burden compounds
Retainage reduces every affected receipt while labor, materials, taxes and subcontractor costs continue on their normal schedules. A contractor can therefore show positive job margin and positive billed revenue while using corporate cash or a credit facility to finance work. AGC notes that the burden can flow down to lower-tier subcontractors as well as the prime contractor. If your company withholds retainage from subcontractors, model both sides: the amount withheld from the owner and the amount you may owe to subcontractors when their contractual release conditions are met.
Classify retainage under the actual payment condition
U.S. GAAP Topic 606 has no retainage-specific rule. A 2025 FASB staff educational paper, Topic 606: Presentation and Disclosure of Retainage for Construction Contractors, explains that classification follows the underlying right to consideration. A right that depends on future performance, customer acceptance or another condition beyond the passage of time may be a contract asset. A right that is unconditional, with only the passage of time before payment, is a receivable.
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The label “retainage” does not decide the classification. One contract can contain an unconditional portion and a conditional portion. The FASB Private Company Council’s April 2024 memo notes that, in practice, retainage may be a receivable, a contract asset, or allocated between them depending on the wording and facts. Contract asset and contract liability balances are considered at the contract level and presented net when the applicable guidance requires it.
Questions to ask for each withheld amount
- Has the contractor completed the performance or acceptance condition that makes the amount payable?
- Can the customer avoid payment for a reason other than the passage of time?
- Is the amount legally and contractually billable now, or does a future inspection, completion certificate, lien release or other event remain?
- Does the contract create an unconditional receivable even though the customer’s payment cycle is later?
- Are there separate retainage terms for the prime contract and each subcontract?
Document the conclusion in the contract file and reconcile it to the general ledger. The FASB staff paper is educational staff guidance, not a new standard; official FASB positions require the normal due-process process. Apply your current accounting policy and obtain professional advice for a material or unusual arrangement.
Record deposits as cash, but do not automatically call them revenue
A deposit can strengthen immediate liquidity while creating an obligation to perform. Under the Topic 606 definition of a contract liability, consideration received or due before the contractor transfers the promised goods or services creates an obligation to transfer those goods or services. IFRS 15 uses the same basic outcome: when payment is received, or an unconditional amount becomes due, before transfer, the earlier event creates a contract liability.
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In the cash forecast, record the deposit once, on the date the bank receipt is expected. Do not count it again as a future collection when the related work is performed. In the accounting records, track the liability until performance satisfies the relevant obligation; revenue is recognized according to the applicable standard, measure of progress and contract facts.
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- Identify whether the amount is refundable, nonrefundable, applied to mobilization, reserved for materials or tied to a specific performance obligation.
- Reconcile the deposit subledger to the bank and general ledger each close.
- Link each release from the liability to documented performance, delivery or another contractual trigger.
- Keep customer funds that are legally restricted or held in trust separate from ordinary operating cash where required.
- Show the deposit’s effect on liquidity separately from earned margin in management reporting.
Do not assume every advance has identical treatment. Contract wording, enforceability, the nature of the promised work and the applicable GAAP or IFRS policy determine the result.
Handle late invoices and slow change orders as scenarios
For every invoice, preserve the stated due date but assign an expected collection date based on current information. When an invoice becomes overdue, move the expected date in the base forecast and add a stress case rather than leaving the original date untouched. The schedule should show the amount at risk, the owner or client contact, the promised payment date and the next escalation step.
AGC’s discussion of federal construction change orders describes how slow processing and payment can interrupt cash flow while contractors continue paying payroll, materials and taxes. Unresolved change-order work can also slow or stop work and create project delays. The practical implication is to separate authorized and billable changes from pending, disputed or unpriced changes. A pending amount can explain future upside or exposure, but it is not collected cash.
A three-case collection model
| Case | Receipt assumption | How to use it |
|---|---|---|
| Committed | Contractual due date, supported by an approved application and no known dispute | Use for the operating plan only when the client’s payment history supports it |
| Base | Expected date adjusted for the client’s normal approval and payment behavior | Use to manage payroll, suppliers and near-term funding |
| Stress | Additional delay, unresolved approval, disputed scope or delayed retainage release | Use to identify the date a funding draw, cost deferral or escalation is needed |
The reviewed AGC material does not establish a current, broadly representative average delay or loss rate for construction payments. Do not substitute an industry-wide percentage for project-specific evidence.
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Example: a monthly cash schedule
The following illustration shows how to keep billed work, retainage and a deposit distinct. Amounts are hypothetical and are not a benchmark.
| Month | Opening cash | Receipts expected in month | Project outflows | Closing cash |
|---|---|---|---|---|
| April | $180,000 | $120,000 progress payment, net of current retainage | $155,000 payroll, materials and subcontractors | $145,000 |
| May | $145,000 | $80,000 customer deposit; $40,000 prior invoice expected late | $170,000 project costs | $95,000 |
| June | $95,000 | $110,000 approved billing; $25,000 pending change order excluded | $165,000 project costs | $40,000 |
| July | $40,000 | $90,000 billing; $30,000 retainage release is only a contingent scenario | $150,000 project costs | $(20,000) before financing or cost action |
The May deposit improves cash but is not automatically May revenue. The $25,000 pending change order is excluded from receipts until authorization and collectibility are established. The July retainage release belongs in a separate scenario until its contractual condition and date are sufficiently certain.
Compare payment arrangements before signing or mobilizing
| Term to compare | Questions to document | Cash-flow consequence |
|---|---|---|
| Payment timing | When is the deposit due? How often are progress applications submitted? What approval period and due date apply? | Determines the earliest and most realistic receipt dates. |
| Retainage | What percentage is withheld? Does it apply to each application? Are there milestone reductions and stated release conditions? | Reduces interim cash and may create a long-dated receipt. |
| Conditionality | Does payment depend on acceptance, future performance or another event beyond time? | May affect contract-asset versus receivable presentation under Topic 606. |
| Change orders | Can authorized work be billed while final pricing is negotiated? Who approves and by when? | Determines whether cost is funded before an amount is billable and collectible. |
| Funding burden | How much payroll, subcontractor, material and tax cash is required during a delay? | Shows the peak borrowing or reserve requirement. |
| Jurisdiction and customer type | Is the job public or private? Which state prompt-payment, retainage and notice rules apply? | Can change deadlines, remedies, release requirements and documentation. |
A repeatable month-end workflow
- Export contract terms. Record billing cadence, retainage percentage, approval steps, due dates, acceptance language, deposit terms, change-order clauses and notice requirements.
- Reconcile actual cash. Tie the opening balance and receipts to the bank. Remove any receipt that has not cleared and investigate unidentified deposits.
- Age every receivable. Show invoice date, due date, days past due, disputed amount, promised payment date and owner of the collection action.
- Roll forward retainage. Reconcile withheld amounts to applications, identify amounts that became unconditional, and attach evidence for any release assumption.
- Roll forward deposits. Reconcile the contract-liability balance and document the performance that supports each release to revenue.
- Separate change-order status. Put approved, billable changes in the receipt schedule; keep pending or disputed changes in a separate exposure report.
- Refresh cost-to-complete cash. Obtain current payroll, subcontractor, purchase-order, equipment and tax commitments from project managers.
- Run scenarios. Delay expected collections, retainage release and change-order approval independently so management can see which event creates the deficit.
- Escalate early. If the stress case breaches a minimum cash reserve, decide whether to accelerate billing, negotiate a payment plan, defer noncritical cost, draw an approved facility or obtain legal advice.
Common errors and how to correct them
Using revenue as a proxy for cash
Revenue measures performance under the applicable accounting model; it does not show when the bank account will be funded. Correct it by maintaining a receipt schedule with expected dates and a separate income statement forecast.
Counting the full invoice as collectible
A gross application can include retainage, prior-period adjustments, disputed work or statutory deductions. Correct it by forecasting the net receipt and listing each withheld or disputed component.
Releasing retainage on a guessed date
Correct it by tying the date to the contract’s milestone or acceptance condition and using a stress case when the owner has not confirmed timing.
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Calling every deposit revenue
Correct it by recording the cash receipt once and tracking the unperformed obligation as a contract liability until the applicable performance criteria are met.
Including unapproved changes in available cash
Correct it by requiring written authorization or another documented billing right before moving an item into committed receipts.
Ignoring lower-tier timing
Correct it by forecasting subcontractor payment dates, including any retainage you owe them, rather than assuming owner receipts and subcontractor obligations release simultaneously.
Legal, tax and accounting boundaries
There is no universal retainage percentage, release deadline, interest charge, late-payment remedy or accounting answer for every U.S. project. Public and private contracts can differ, and state prompt-payment or retainage laws may impose requirements that are absent from another jurisdiction. Federal change-order examples cited by AGC are historical, dated examples, not an industry-wide statistic.
Before issuing a definitive classification or pursuing a remedy, verify the current contract, applicable U.S. GAAP or IFRS policy, customer type, project jurisdiction, notice provisions and lien or bond requirements with the company’s accountant and construction counsel. A cash forecast is a management tool; it does not replace legal, tax or financial-reporting advice.
Further reading
AGC’s Guide to Construction Financing, Second Edition is described by AGC as a contractor reference on financing risks and opportunities. It is supplemental reading, not a retainage ledger or cash-flow calculator. AGC’s 2009 specialty-contractor resource also notes that its best-practices work drew on responses from more than 1,000 AGC specialty-contractor members to a late-2008 retainage survey; that dated participation count is not a current or representative estimate of all contractors.
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