Building Better Forecasts: Cash Flow Management for Construction Firms

Why Cash Flow Forecasting Matters in Construction

Cash flow is the lifeblood of any business, but for construction firms, it can be uniquely volatile. Projects are long, billing is often delayed, and costs tend to be front-loaded. Subcontractors and vendors need to be paid on time, even when client payments are weeks or months away. Without clear forecasting, even profitable projects can create liquidity crises.

For finance leaders in construction, mastering cash flow forecasting is not just about survival—it’s about unlocking the ability to scale, take on more projects, and invest with confidence.

The Challenges of Construction Cash Cycles

Construction firms face challenges that make forecasting harder than in most industries:

• Project-based billing: Cash inflows often depend on milestones, not steady monthly revenue.
• Retainage: A percentage of each invoice is withheld until project completion, creating built-in cash delays.
• Front-loaded costs: Materials, equipment, and labor expenses must be paid upfront, long before revenue is collected.
• Subcontractor reliance: Payment terms for subs and vendors are often shorter than client collection timelines.
• Change orders and delays: Project timelines shift constantly, impacting both costs and collections.

These realities make a static, annual budget ineffective for managing cash. Construction CFOs and controllers need dynamic, rolling cash forecasts that can adjust as projects evolve.

Best Practices in Construction Cash Flow Forecasting

1. Forecast at the Project Level

Construction firms operate in a project-driven environment where cash flows are inherently tied to individual contracts, not just the company’s overall financial picture. Forecasting at the project level—rather than relying solely on a company-wide view—is critical for accurately managing liquidity and ensuring operational stability.

A company-level forecast risks masking cash flow gaps caused by individual projects, leading to inaccurate assumptions about available liquidity. For example, a firm managing three projects—one overbilled, one underbilled, and one delayed—may appear cash-positive at the company level but face shortfalls on the delayed project. Project-level forecasting uncovers these discrepancies, enabling finance teams to allocate resources effectively, prioritize collections, or secure financing before crises emerge.

Tip: Use work-in-progress (WIP) reports as inputs to forecast remaining billings and expected collections.

2. Incorporate Milestone Billing Schedules

In construction, cash inflows are rarely consistent or predictable like monthly revenue in other industries. Instead, client payments are typically tied to specific project milestones—such as completing foundation work, structural framing, or final inspections—outlined in the contract. Incorporating these milestone billing schedules into your cash flow forecast is essential to align expectations with reality and avoid overstating available liquidity. By mapping cash inflows to contractual terms, including retainage and potential delays, finance teams can create accurate, reliable forecasts that reflect the true timing of cash receipts.

Example: A $1M project may be billed in 5 phases of $200k, but if 10% retainage is applied, the final $100k won’t be collected until months after completion. Forecasting must reflect this reality.

3. Model Retainage Separately

Retainage is a common practice in construction contracts where a portion of each invoice – typically 5-10% – is withheld by the client until the project is fully completed and approved. This “trapped cash” ensures contractors meet quality standards and complete all work, but it can significantly strain liquidity, especially on long-term or large-scale projects. For construction finance teams, treating retainage as a separate line item in cash flow forecasts is critical to understanding true available cash versus pending receivables.

Scenario Planning Idea: What happens if multiple large projects all finish at the same time and release retainage in one quarter? That can be planned for proactively.

4. Stress-Test for Delays

Project delays are inevitable. Forecasts should include sensitivity scenarios that simulate what happens if billing milestones shift out by 30, 60, or 90 days. This allows finance leaders to prepare contingency plans, such as drawing on credit facilities or renegotiating vendor terms.

Delays are a fact of life in construction, whether caused by weather, supply chain disruptions, labor shortages, or client approval bottlenecks. These setbacks can shift billing milestones, delay cash inflows, and strain liquidity, even on profitable projects. Stress-testing your cash flow forecast for potential delays is essential to anticipate these risks and prepare contingency plans. By modeling scenarios where milestones slip by 30, 60, or 90 days, finance leaders can identify vulnerabilities, secure financing, renegotiate vendor terms, or adjust project priorities to maintain operational stability.

Without stress-testing, a forecast may assume timely payments, leaving firms unprepared for cash shortages. For example, a 60-day delay on a $500,000 milestone payment could force a contractor to tap into reserves or delay vendor payments, risking penalties or strained relationships.

5. Link Labor and Procurement Costs

Labor and procurement costs, including materials and equipment, are among the largest and most immediate cash outflows for construction firms. Unlike milestone-driven client payments, these expenses follow rigid schedules—payroll is typically weekly or biweekly, and vendors often demand payment within 30 days. Linking these costs directly to your cash flow forecast ensures expenses are timed accurately, avoiding the pitfalls of assuming costs are spread evenly across a project’s timeline. By aligning labor and procurement outflows with their actual payment schedules, finance teams can anticipate cash needs, prevent liquidity shortages, and maintain project momentum.

Construction projects often have front-loaded costs, with significant spending on labor and materials occurring early in the project cycle, long before milestone payments are received. Misaligning these outflows in a forecast can lead to cash flow gaps, especially during peak construction phases. For example, a $1M project requiring $300,000 in materials and $200,000 in labor in the first two months may face a shortfall if milestone payments don’t arrive until month three. Accurate forecasting tied to payroll and procurement schedules helps CFOs plan for these imbalances, ensuring funds are available to keep projects on track without delaying vendor payments or risking labor disruptions.

Key Metric: Track “cash burn per project week” to anticipate liquidity needs during peak cost periods.

Metrics Every Construction CFO Should Monitor

• Days Sales Outstanding (DSO): How quickly are client invoices being collected? A high DSO signals slow collections, prompting action like stricter credit terms.
• Cash Conversion Cycle (CCC):  Measure the time from paying suppliers to collecting from clients. A shorter CCC indicates better cash efficiency, critical for funding new projects.
• Work-in-Progress (WIP) Billing Status:  Compare billed amounts to work completed. Overbilling can signal future cash shortages if projects fall behind.
• Liquidity Buffer: How many weeks of payroll and overhead can be covered without new collections?

Monitoring these alongside forecasts gives CFOs early warning signals of stress.

How Pegasus Helps Construction Finance Teams

Pegasus Insights was built by financial consultants who’ve supported project-driven businesses like construction firms. Our platform simplifies forecasting with:

• Real-Time Cash Visibility: Daily syncs from banks and ERPs, so you always know true cash on hand.
• Project-Level Forecasting: Map inflows/outflows by project, milestone, or entity.
• Scenario Planning: Instantly model project delays, cost overruns, or retainage release schedules.
• Automated Updates: No more static spreadsheets—forecasts refresh as data changes.

By connecting forecasting directly to live data, Pegasus empowers construction finance leaders to proactively manage liquidity, even through complex billing and project cycles.

Conclusion: Turning Forecasts into a Competitive Advantage

For construction companies, cash flow forecasting isn’t just a back-office function—it’s a strategic advantage. Firms that forecast accurately can:

• Take on larger or more simultaneous projects with confidence
• Negotiate better terms with banks and vendors
• Avoid liquidity crises caused by project delays or retainage
• Invest in growth opportunities without overextending

When finance leaders have clarity, they can keep projects moving, protect margins, and scale sustainably. With tools like Pegasus Insights, construction firms gain both the discipline of rigorous forecasting and the agility of real-time insights.

Want to see how Pegasus helps construction finance teams forecast with confidence?