Subcontractors finance the projects they work on. They buy the material, make payroll every week, and then wait months to be paid, with a slice of every payment held back until the whole job is done. The result is a cash squeeze that has almost nothing to do with whether the work is profitable on paper. A sub can be profitable on every job and still run out of cash, because the profit is trapped in receivables and retainage while the costs are paid now.
How does retainage drain cash?
Retainage is a percentage of each progress payment withheld until the project reaches completion. Private construction retainage averages around 7.59 percent according to a study by the Foundation of the American Subcontractors Association, and it is withheld from the sub on every draw. On a $2 million subcontract, a 7.59 percent hold is roughly $150,000 that the sub has earned but cannot touch, often for a year or more, until the general contractor closes out the job and releases retention. The sub paid the labor and material that earned that money months earlier.
Retainage is your profit, held hostage
On many subcontracts, the retainage percentage is close to the profit margin. That means the entire profit of a job can be sitting in retention, released only at closeout, while the sub has already spent the cost of the work. Getting retention released on time is not housekeeping, it is the difference between a profitable job and a loan you made to the GC for free.
What is DSO and why is it so high in construction?
Days sales outstanding, or DSO, measures how long it takes to collect a receivable after billing. Construction runs one of the highest DSO figures of any industry, averaging around 82 days according to industry surveys, versus roughly 40 for many other sectors. The reasons are structural: pay-when-paid clauses push the sub behind the GC, the GC waits on the owner, monthly billing cycles add weeks, and retainage stretches the tail out past a year. A high DSO means the sub is carrying the cost of the work far longer than the calendar of the work suggests.
How to calculate construction DSO
DSO is accounts receivable divided by total credit sales, multiplied by the number of days in the period. If you have $1.5 million in receivables against $6 million in annual billings, your DSO is about 91 days. The number is only useful if you track it over time and by customer, because a single slow-paying GC can drag the whole figure and hide that the rest of your book pays reasonably.
Where does the cash actually go?
Follow one job. The sub buys material and pays for it in 30 days. It runs payroll weekly the entire time crews are on site. It bills at the end of each month, then waits for the GC to review the pay application, which can take two to four weeks. The GC pays only after the owner pays the GC. Retainage is withheld from every payment. So the sub has funded weeks of payroll and material out of pocket before the first dollar arrives, and the last dollar, the retention, shows up a year after the work is done.
Is retainage legal, and are there caps?
Retainage is legal, but most states cap it and regulate how and when it is released, especially on public work. California caps retention on public works at 5 percent. Other states set their own limits, and many have prompt-payment statutes that require retention to be released within a fixed number of days after completion or acceptance, with interest owed if it is late. Private contracts have more freedom, which is where the higher percentages show up, and where reading the retainage and release terms before signing matters most. The practical takeaway is that retention is not an open-ended hold the paying party can sit on forever. There is usually a statutory clock, and knowing it is the difference between asking nicely and asserting a right.
When does retention actually get released?
Retention is supposed to be released when the work it secures is complete and accepted, but the trigger is contractual and it is where cash gets stuck. On a subcontract, retention is often not released until the entire prime contract closes out, not just the sub's scope, so a sub that finished its work in month three can wait until the whole building is done in month eighteen. Getting it released on time takes active management: knowing the contractual trigger, having the closeout documents and final lien waivers ready, and asking the moment the condition is met. Retention that is earned and due does not release itself. It releases when someone tracks it and requests it.
Should a subcontractor factor or finance receivables?
When the gap between paying costs and collecting cash gets wide enough, subs turn to financing: a line of credit, invoice factoring, or supplier terms. These bridge the gap, but none of them are free, and they are treating a symptom. Factoring sells a receivable for less than its face value, which is a real cost against a margin that retainage has already thinned. A line of credit carries interest for the months the cash is out. The cheapest form of financing a sub has is collecting its own receivables and retention faster, because that cash costs nothing. Borrowing to cover a slow collection cycle makes sense as a bridge, but shortening the cycle is what actually protects the margin.
How do subcontractors get paid faster?
- Bill on time and bill clean, because a pay application with a math error or a missing lien waiver gets kicked back and restarts the clock.
- Track retention per job and per customer, so you can request release the moment a job closes out instead of discovering it months later.
- Send the conditional lien waiver with the billing, not after, so the waiver is never the reason a payment is held.
- Measure DSO by customer, so you know which GCs actually cost you money to work for.
- Follow up on aged receivables on a schedule, because the invoice that gets a call gets paid before the one that does not.
How does slow cash actually kill subcontractors?
The classic failure is a growing subcontractor that runs out of cash while winning more work, and it happens because growth makes the squeeze worse, not better. Every new job requires funding weeks of payroll and material before any money comes back, and adds more retainage to the pile of profit that will not release for a year. So the faster a sub grows, the more of its own cash it is lending to its projects at once. A single large, slow-paying job on top of that can tip a profitable company into missing payroll. This is why contractors fail in good markets as often as bad ones: the books say the jobs made money, but the money is trapped in receivables and retention, and payroll is due on Friday.
The defense is visibility and discipline, not a bigger line of credit. A sub that knows exactly what is owed, by whom, how aged it is, and how much retention is sitting unreleased on which jobs, can act before the gap becomes a crisis. The one that finds out at month-end is already behind.
The common thread is that getting paid is an operational discipline, not an accident of good clients. Buildalytic tracks retention and receivables per job and per customer, generates the right lien waiver with each billing, and flags aged invoices and unreleased retention, so the cash that has been earned actually comes in.