10.1 Cash Flow Projections, Receivables Management & Collections

10.1 Cash Flow Projections, Receivables Management & Collections

Exam Focus: The Florida Construction Industry Licensing Board (CILB) Business and Finance examination tests cash management as a core contractor competency. Construction firms rarely fail because of a lack of work; they fail because of cash insolvency. Contractors must master the mechanics of cash forecasting, the enforcement of statutory prompt payment rights under Florida Statutes § 218.70 and § 715.12, accounts receivable aging, and commercial collection remedies.

The Reality of Construction Cash Flow vs. Accrual Accounting

In construction financial management, profit is an accounting concept, while cash is a tangible survival requirement. Under accrual-basis accounting, revenue is recognized when progress billings are submitted or when percentage-of-completion milestones are reached, and expenses are recognized when incurred. Consequently, an income statement can display a robust net profit of $250,000 while the contractor's operating bank account is completely overdrawn. This condition—frequently termed profitable insolvency—is especially acute during periods of rapid business expansion, when working capital demands for payroll, fuel, and materials outpace cash collections from owners.

The Cash Conversion Cycle in Contracting

The Cash Conversion Cycle (CCC) measures the elapsed time from when a contractor invests cash into direct labor and raw materials until cash is collected from the project owner:

• Days Sales Outstanding (DSO): Average time between issuing an Application for Payment (AIA G702/G703) and receiving the owner's payment (typically 45 to 75 days in commercial construction).
• Days in Work-in-Progress (WIP): Time spent performing work before it can be measured and billed at the monthly cutoff (typically 15 to 30 days).
• Days Payable Outstanding (DPO): Time the contractor takes to pay trade suppliers and subcontractors (typically 30 days).

Because labor must be funded weekly or bi-weekly and equipment rentals must be paid on standard terms, contractors routinely experience a float gap of 30 to 60 days where they effectively serve as the uncompensated bank for the project owner.

Retainage and the S-Curve Dynamic

Most commercial and public contracts mandate retainage—typically 5% to 10% withheld from each progress payment until final project acceptance. When a general contractor operates at an average pre-tax profit margin of 4% to 6%, the retainage withheld exceeds the contractor's entire projected profit margin. Cumulative cash flow on a commercial project follows an S-curve: early mobilization and site work generate negative cumulative cash flow; the cash trough typically bottoms out when the project is 30% to 50% complete; and the contractor does not break even on net cash until retainage is released months after substantial completion.

Note: In the model above, peak negative cash flow occurs in Month 3 at ($230,000). A contractor without adequate revolving credit would fail during Month 3 despite generating $130,000 in overall contract profit.

---

Florida Prompt Payment Statutory Framework

Florida uses different prompt-payment statutes for state public work, local-government work, and private construction. Always identify the project type before choosing a deadline or interest rate.

Public Projects

• Local government — F.S. § 218.735: Payment timing depends on whether an agent must approve the request before submission to the local government. The statute contains distinct review, rejection, and payment periods rather than one universal owner deadline.
• State projects — F.S. § 255.073: State-agency construction payments follow the state prompt-payment process.
• Downstream payment: After receiving the corresponding public payment, a prime contractor generally must pay subcontractors and suppliers within 10 days; a paid subcontractor generally must pay lower tiers within 7 days.
• Interest: Current state and local public-construction provisions impose 2% per month on late undisputed amounts, or a higher contract rate where the statute permits.

Private Construction — F.S. § 715.12

The private act does not supply the guide’s former blanket “owner pays in 14 days” and “prime pays on the earlier of 30 days or 14 days after receipt” rules. For a covered payment obligation:

1. Payment becomes due under the written contract’s stated timing and conditions.
2. For a contractor, subcontractor, sub-subcontractor, or material supplier, upstream payment is one statutory condition unless the payor is the owner; the claimant also must provide the required written request and any contractually required affidavit, release, waiver, or supporting documents.
3. If an undisputed amount remains unpaid, interest begins on the 14th day after payment is due.
4. The interest rate is the judgment rate established under F.S. § 55.03 plus 12 percentage points per annum.

Lien, bond, stop-work, and contract remedies have separate prerequisites and deadlines. A prompt-payment interest claim does not extend the 45-day notice, 90-day lien/bond notice, or one-year suit periods.

---

---

Commercial Accounts Receivable Management & Collection Escalation

Managing accounts receivable requires systematic tracking through an A/R Aging Schedule, which categorizes outstanding invoices into 30-day chronological buckets:

• Current (0–30 days): Invoices within normal credit terms. Courtesy confirmation calls ensure the pay application was received and is processing smoothly.
• 31–60 days: Invoices past contractual due dates. Issue formal statements of account and direct inquiries to the project manager.
• 61–90 days: High-risk delinquency. Send a formal demand letter citing the applicable contract and statutory interest remedy and outlining intent to enforce lien or payment bond remedies.
• 90+ days: Critical default. Immediate statutory enforcement required.

Statutory Security: Liens vs. Payment Bonds

• Private Construction (Florida Statutes Chapter 713): A contractor or lienor who is not in direct privity with the owner must serve a Notice to Owner (NTO) within 45 days of first furnishing labor or materials. To preserve lien rights, the Claim of Lien must be recorded within 90 days of the final furnishing of labor or materials. Foreclosure actions must be filed within 1 year of recording.
• Public Construction (Florida Statutes § 255.05): Florida public property cannot be liened. Instead, claimants protect their receivables by serving a timely Notice of Nonpayment against the general contractor's statutory payment bond within 90 days after final furnishing.

The Contractual Right to Stop Work

Under standard industry agreements such as AIA Document A201 (General Conditions of the Contract for Construction, Section 9.7):

• If the architect fails to issue a Certificate for Payment through no fault of the contractor within 7 days after receiving the Application for Payment, or
• If the owner fails to pay the contractor within 7 days after the date established in the contract documents,
• Then the contractor may, upon 7 days' advance written notice to the owner and architect, stop work until payment of the certified overdue amount is received.
• The contract sum must be increased by the amount of the contractor's reasonable costs of shut-down, delay, and start-up, plus interest as provided in the contract documents.

Stopping work without strict adherence to contractual notice procedures constitutes a material breach of contract, subjecting the contractor to wrongful termination and delay damages.