In today’s competitive construction industry, achieving stronger cash flow and providing more to employees are key goals — but they often feel out of reach. Doubling cash flow isn’t about luck — it’s about implementing strategic financial practices. And it all starts with a deep understanding of the numbers that drive the business.

This article explores how contractors can leverage financial resource optimization strategies to not only boost cash flow, but also improve profitability, enhance operational efficiency, and increase employee retention.

Building a Strong Financial Foundation

Many business owners believe they understand their operations, but critical issues often remain hidden. A deep understanding of business matters including cash flow, financial performance, job-costing, and profitability are essential for long-term success.

The challenge isn’t complacency — it’s the lack of financial support systems and actionable insights needed to make smart decisions. With dozens of employees and hundreds of jobs in progress, keeping every detail straight is nearly impossible without a system designed to streamline data analysis. This enables faster, more informed decision-making.

Many accountants, bookkeepers, CPAs, and even CFOs provide reports but the key is to also provide strategic insight to drive profitability. Outsourcing to general bookkeeping services or relying on undertrained staff only compounds the issue of these missing strategic insights. While reports focus on year-end results and tax compliance, they rarely address operational improvements critical to growth. The bottom line is that critical financial blind spots can remain unnoticed until it’s too late.

Meanwhile, demand for construction services is outpacing supply. Job growth is forecasted at 4% in 2025, with total construction spending projected to reach $2.16 trillion.¹

At the same time, the skilled labor shortage continues to worsen. According to the Associated Builders and Contractors (ABC), every $1 billion in additional spending creates 3,550 new jobs² — requiring tens of thousands of new workers in an industry already struggling to attract talent.

The solution lies in optimizing financial resources — paying employees more while ensuring profitability by passing costs on to clients.

Financial Resource Optimization

This is where financial resource optimization becomes essential, by providing a strategic framework for achieving profitability while supporting business growth and employee retention.

Putting a strong system of financial resource optimization in place requires an in-depth understanding of how and where you make your money — down to every aspect of every job. You need a comprehensive view of the cost of doing work as well as effective work-in-progress (WIP) scheduling, accountability for project management, strict accounts receivable (A/R) procedures, conscious cash flow management, and the right team in place.

The Real Cost of Doing Business

To understand how this will work effectively, you need to first understand the basics, including gross profit percentage on labor and compensation rate, also known as the comp rate. The comp rate is the cost of an employee per hour including hourly wage, taxes, insurance, and direct overhead.

It’s best practice to calculate your comp rate at least twice per year — once during annual budgeting and again after raises are applied. Either way, it is recommended to calculate your comp rate regularly to ensure accuracy. Then, make sure everyone in the organization knows the numbers, including the company’s owner, estimators, project managers (PMs), and the accounting team, who can verify that the comp rate is accurate.

If any of these groups are unaware of the comp rate, then you could be leaking profits from your jobs and ultimately hurting your bottom line. Leaky profits result in decreased net income.

Throughout the construction industry, many contractors have accounted for the increase in material costs in their projects but have not necessarily increased their labor costs for fear that higher total project costs will scare away clients. As a result, job prices may rise, but profit margins often stagnate or shrink. Do you know the actual cost per hour for every employee? If you bid on a job based on $70 an hour and it turns out your actual cost is $77 an hour, then your margins will take an immediate hit. 

Small losses of margins can sneak up on you. Even if your employees’ pay remains the same, they may be costing you more due to the rising cost of benefits. Your insurance rates or accounting fees may be going up. Your rent or overhead might be rising. All of these factors matter and need to be accounted for when bidding on jobs.

Exhibits 1 and 2 illustrate how comp rate calculations can be used to double profitable cash flow and pay your employees more. Not only does it help you retain your skilled workers, and attract new ones due to the higher pay rates, but it can also double your cash flow.

Even during an economic slowdown, the increased revenue from precise comp rate calculations will more than make up for any lower-end jobs you may lose to your competitors. Let competitors bid lower if they want — chasing unprofitable jobs is a losing strategy. The simple truth is that if a job isn’t profitable, then taking on more of the same will only compound your losses. The jobs you take on must be profitable for your company to thrive.

Managing the WIP Schedule

To drive higher profitability, it is vital that contractors manage their WIP schedule tightly. Even if you have a structure in place, it may not be enough. 

For example, you may have a CPA firm that calculates your WIP. A CPA will typically have a cutoff based on your billing, potentially only including jobs exceeding $100,000, but what about the jobs falling below that threshold? You might have 10, 50, or 100 jobs under $100,000, which are still substantial contributors to your cash flow. In this case, a substantial amount of your work may be missing from your WIP.

If you’re not analyzing the WIP completely, then you may be losing money on jobs without knowing it. Even if you are highly profitable on the jobs exceeding $100,000, you could be losing enough money on the smaller jobs to significantly impact your overall bottom line.

Checking your WIP each month doesn’t provide you with the level of detail you need to properly evaluate it — it only tells you how much money you are making on a job. Most business owners ensure the numbers look good and trend in the right direction, but only a few drill down to analyze the factors impacting those rates, which include:

• Production efficiency
• Acts of God (such as weather)
• Schedule compression by the owner
• Employee skill ratio (i.e., whether your job is staffed with apprentices, journeypersons, or forepersons)
• Change order management
• Out-of-scope work
• Project management

Project Management Accountability

Another place contractors lose money is through ineffective project management. Inefficiency drives up costs, but without clear accountability, financial leaks can persist unchecked. Yet, if you don’t know your numbers, it’s difficult to hold anyone accountable.

Contractors need to set goals for each project and ensure PMs are aligned with them and held accountable for results. One way to foster accountability is to tie bonuses to both financial goals and project goals. The most common goals are revenue, gross profit, and gross profit percentage. It is important to track these metrics monthly by job and in accumulation.

One of the most missed opportunities is tracking the gap between the project completion date vs. the budgeted project completion date. This captures profit variances and highlights missed opportunities for change orders, which can leave millions of dollars missing from the company’s bottom line.

Managing A/R

Managing your A/R is another essential component of financial resource optimization. A/R has the potential to be either a significant asset or a major risk. Failure to have accurate and timely tracking of receivables, solid collection policies in place, or failure to manage your lien rights can critically damage cash flow. When you see outstanding bills start going into the days beyond term column, it’s time to act.

To be successful, businesses must establish baseline procedures for A/R and must ensure the accounting department is responsible for adhering to those procedures.

Cash Flow Management

As most contractors already know, managing cash flow in a construction business is a constant challenge. Contractors struggle with cash flow for several construction-specific reasons, including: 

• Significant upfront costs for materials, labor, and equipment, which can create a cash shortfall for paying bills and purchasing new materials.
• Seasonal demand, which creates uneven cash flow during slower periods.
• Cost overruns from delays, changes in scope, or increased material and labor costs.
• Payment delays.
• Limited financing options that restrict the ability to access working capital.

Cash flow is critical to keeping your business running, from paying suppliers to making payroll, and many businesses stand to gain by implementing better cash flow management. Here are five ways to reduce the cash flow crunch in your construction business:

1. Strengthen invoicing and payment processes: Be sure to track days sales outstanding (DSO), which is the average number of days it takes to collect your A/R. Delayed or late payments from customers can significantly affect your cash flow, so it is important to invoice promptly and follow up on outstanding payments in addition to closely monitoring DSO.
2. Negotiate payment terms with suppliers: Another effective way to manage cash flow is to negotiate better payment terms with suppliers, which can include discounts for upfront payments or longer payment terms.
3. Optimize procurement: Excess inventory can tie up working capital and contribute to the cash flow crunch. Evaluate current supply chain management to assess risk, ensure supplier redundancy, and optimize procurement processes to order only what is needed when it is needed.
4. Increase efficiency and productivity: Tighter project management processes can reduce costs and delays and optimize revenue, which ultimately boosts cash flow. Consider expert process reviews as well as implementing technologies or process automation where possible to boost efficiency.
5. Monitor and forecast cash flow: Regularly monitoring and forecasting cash flow can identify problems or shortfalls before they become significant — and help you enable proactive financial planning.

The Right Financial Team

If you have a CPA on your team, then it’s tempting to think you have finance and accounting covered. You may even have a controller to oversee the accounting team, but is that sufficient for long-term growth? If you want to grow your business, then you need strategic, high-level financial expertise. Most contractors making $5-50 million in annual revenue don’t have that expertise on staff — and this limitation hinders their growth potential.

A CPA is a necessary part of the team — this person is an expert in accounting and tax compliance and helps your business with day-to-day accounting services like bookkeeping, tax planning, financial statement preparation, and audits while also maintaining accurate financial records. Their role is to ensure that your business complies with all tax laws and regulations and legally minimizing tax liabilities.

A controller, as well as the CPA, focuses on accuracy of past transactions. The missing piece is a financial professional with industry experience who is trained to look ahead to the future of your finances rather than at the past.

A CFO is a financial strategist who provides high-level advice and guidance to your business for today and for the future. They can develop financial plans, handle forecasting and budgeting, and identify promising opportunities to improve financial performance and grow your business. A fractional CFO will also help guide capital raising and financial reporting and oversee any compliance issues.

While a CPA and a controller both play important roles in comprehensive financial management, a CFO provides services that go well beyond the scope of the CPA and controller, including: 

• Developing and implementing financial strategies: A CFO works alongside CPAs and controllers to craft long-term strategies that align with goals and objectives. Then they implement these strategies and monitor the business’s performance to ensure effectiveness and progress toward goals.
• Financial analysis and forecasting: A CFO conducts detailed financial analysis and forecasting to identify trends and opportunities and reduce risks. Ultimately, the goal is to create financial clarity that helps companies make better decisions.
• Managing and optimizing cash flow: Cash flow can be a challenge for any business, but high upfront costs and seasonality make it even more challenging for contractors. A savvy CFO can help reduce the cash flow crunch by developing and implementing strategies to optimize access to working capital (while reducing risk). These can include identifying inefficiencies that erode profitability.
• Guiding financing and capital raising: Growing a business introduces new financial complexity. A CFO can help secure financing and raise capital by developing financing strategies, preparing financial statements, and conducting due diligence. They can also help to identify potential sources of funding and even negotiate terms with investors and lenders.
• Navigating growth opportunities: If you know you want to grow, but aren’t exactly sure how, a CFO can make all the difference for your firm. They will providing guidance on mergers and acquisitions, valuations, and other high-level financial decisions that shape the business’ future.

The Big Picture

Success in the construction industry goes beyond completing projects — it requires a holistic approach to financial management. Thriving in this complex field means not only understanding the numbers, but also knowing how to leverage them strategically.

Seeing the big picture of construction finances is less like observing a flat image and more like piecing together a dynamic mosaic, where every component — from WIP management to cash flow optimization — plays a vital role.

Financial resource optimization offers a clear framework for uniting these critical elements, empowering construction business owners to enhance profitability, strengthen operational efficiency, and secure long-term growth. With financial resource optimization, contractors gain the tools needed to transform financial complexity into opportunity, turning a fragmented financial landscape into a cohesive, thriving enterprise.

Endnotes

1. “ABC: 2024 Construction Workforce Shortage Tops Half a Million.” Associated Builders and Contractors. January 31, 2024. abc.org/News-Media/News-Releases/abc-2024-construction-workforce-shortage-tops-half-a-million.

2. Ibid.