How to Manage Cash Flow as a Contractor

Most small contractor cash flow failures trace to three patterns. First, billing one lump sum at the end of a long project means the contractor finances the materials, labor, and overhead for 8 to 16 weeks before any payment arrives. Second, slow A/R collection (60 plus days from invoice to payment) compounds when the next job starts before the last one collects. Third, committed material spend (purchase orders, deposits to suppliers) often runs ahead of milestone draws, so the contractor carries the supplier financing risk. The fix is structural, not personal: a billing cadence that puts cash in the door faster than committed costs go out.

Milestone billing splits a job into 4 to 8 progress payments tied to verifiable completion steps: deposit on contract, materials delivered, first inspection, mid-project draw, near-completion, and final. A typical $60,000 residential remodel under milestone billing collects $15,000 on signing, $15,000 at materials drop, $15,000 at mid-project, and $15,000 at completion. The same job under lump sum collects $60,000 at completion, 10 to 14 weeks later. The math shifts from 'finance the whole job' to 'collect as you go.' Pair milestone billing with a deposit of 25 to 40 percent at signing where state law allows (some states cap the deposit; California caps at 10 percent or $1,000 whichever is lower).

Net-7 or net-14 on progress draws beats net-30 by a wide margin. The shorter the terms, the smaller the gap between billed and collected. Some homeowner contracts default to net-30 because the contractor copied a template; rewrite to net-7 with a 1.5 percent monthly late charge after 14 days. On commercial subcontracts, the GC sets the cycle, but you can negotiate retainage percentage and final payment timing. Always include a clear payment terms paragraph on the bid PDF and the contract, not just the invoice.

• Net-7 on progress draws for residential.
• Net-14 on residential final invoice.
• Net-30 only when commercial GC dictates and the relationship justifies it.
• Late charge: 1.5 percent monthly after 14 days past due.

Track four numbers every Monday: cash in bank, accounts receivable total, accounts receivable aging (0-30, 31-60, 61-90, over 90), and committed costs over the next 4 weeks (open purchase orders, supplier deposits, payroll). The goal: cash plus 0-30 A/R must exceed committed costs every week. If 31-60 A/R grows month over month, A/R collection is slipping. If committed costs exceed cash plus 0-30, the next 4 weeks are at risk. A simple Google Sheet refresh, or the project workspace inside ContractShield, holds these numbers.

Mechanic's liens give a contractor the right to file against the property for unpaid work performed. Most states require a preliminary notice (sometimes called a 20-day notice or Notice of Furnishing) sent at the start of the job to preserve lien rights. Filing the actual lien comes later if payment is not made. The mere existence of lien rights changes payment behavior: a homeowner refinancing or selling cannot clear title without paying liened balances. Always send the preliminary notice on every project where the state requires it. Track filing deadlines in the project workspace.

If your job mix has a 30 to 90 day payment cycle (commercial subs, government work) and milestone billing is not available, A/R factoring or a contractor line of credit fills the gap. Factoring sells your invoices to a third party at a 2 to 4 percent discount; you collect 96 to 98 percent immediately and the factor collects from the customer. A line of credit (LOC) at 8 to 12 percent annual rate is cheaper than factoring when used in short bursts to bridge payroll. Use both tools strategically: factoring on large slow-pay invoices, LOC for short payroll gaps. Do not finance a structural cash flow gap; fix the structure (milestone billing, faster terms).

A project workspace that ties invoices to milestones eliminates the most common A/R drag: client confusion about what is owed and why. When the homeowner sees the bid, the milestone progress, the photo log, and the invoice in one place, payment time drops dramatically. ContractShield routes milestone payments through Stripe with automated reminders, and the 1 percent platform fee deducts at each milestone. The default cycle moves contractors from 60 day chase to 14 day cycle. Combined with deposit collection and lien notice tracking, the workspace becomes the cash flow operating system.