Contractors go under not because they run out of work, but because they run out of cash. Construction is unusual in that you spend money before you get paid, and the gap between those two events can be months. Understanding cash flow is one of the most practical skills a QS or estimator can develop.
Why Construction Cash Flow Is Different
In most industries, you make a product and then sell it. In construction, you commit costs upfront, often before the client has paid the previous month’s claim. Subcontractors expect payment within 20 days. Suppliers expect payment on invoice. But the main contractor might wait 45 to 60 days to receive money from the principal.
Add retention to the mix and the picture gets worse. Retention holds back a percentage of each payment until the work is complete, or until the defects liability period ends. On a $10 million project with 5% retention, the contractor is effectively lending the principal $500,000 interest-free for the duration of the job.
This is why cash flow planning is not an optional exercise. It is a commercial survival tool.
The S-Curve
Anyone working in construction has seen the S-curve. It plots cumulative expenditure or revenue against time, and the shape is always the same: slow at the start, steep in the middle, flat at the end.
In the early stages of a project, spending is low. Preliminaries are being set up, subcontractors are mobilising, and design is still being resolved. As the project hits its production phase, costs accelerate. The bulk of the contract value flows through a relatively short window in the middle of the programme.
The S-curve matters because it lets you forecast when cash will be needed and when revenue will arrive. If the expenditure curve runs ahead of the income curve, you have a cash deficit. Knowing that six months in advance gives you options. Finding out two weeks before it happens does not.
A construction cash flow projection maps these two curves against each other. The gap between them is the funding requirement at any point in the project. Lenders, surety companies, and boards all want to see this before a project starts.
Common Failure Points
Late payment is the most common cause of cash flow problems. Under NZS 3910, the principal must pay within a set timeframe after the payment schedule is issued. Under the Construction Contracts Act 2002, failure to pay gives the contractor the right to suspend work. In practice, many contractors absorb late payment for months before taking formal steps. That absorbing of cost is cash flow stress.
Front-loading is a tactic contractors use to improve early cash flow. By pricing preliminaries and early-stage items higher and late-stage items lower, the contractor recovers cash early in the project. It is a legitimate approach but it carries risk. If the project is terminated early, the contractor may have been paid for work not yet done.
Retention is a structural cash flow drag. Many contractors treat it as a write-off until it eventually gets released. The better approach is to track retention actively, diarise the defects liability period end dates, and issue formal requests for release when the time comes. Unclaimed retention is money left on the table.
Subcontractor cash flow is another pressure point. A main contractor who gets paid late but must still pay subcontractors on time is funding the gap from their own resources. Subcontract agreements should mirror the main contract payment terms where possible, though there are limits to how much of this risk can be pushed down the chain.
How a QS Tracks Cash Flow
On most projects, the QS builds and maintains the cash flow model. This starts at tender stage, where the programme is used to spread the contract sum across months and predict when revenue will arrive.
During the project, the model gets updated monthly. Variations change the contract value. Programme slippage shifts when costs are incurred. Retention releases update the revenue side. A cash flow model that is not updated is not useful.
The QS also tracks payment claims and certificates. Each month, the progress claim goes out, the engineer certifies, and the payment is made. Tracking the gap between claimed and certified amounts, and between certified and paid amounts, tells you whether the client is managing their obligations.
In our experience, the QSs who are most valuable to contractors are the ones who can produce a clear cash flow report at short notice and explain what it means. This is not complicated work, but it requires discipline and consistency.
Payment Terms Under NZS 3910 and the CCA
NZS 3910 sets out the payment claim and payment schedule cycle in detail. The contractor submits a progress claim by a date agreed in the contract. The engineer assesses it and issues a payment schedule within a defined timeframe. The principal pays the scheduled amount by the due date.
The Construction Contracts Act 2002 underpins this. If the principal fails to issue a payment schedule in time, the full claimed amount becomes payable. If payment is not made, the contractor can suspend or pursue adjudication. The CCA gives teeth to the payment process that the contract alone does not have.
For QSs working on the principal’s side, the obligation is to assess claims accurately and on time. For QSs on the contractor’s side, the obligation is to submit accurate, well-evidenced claims and to follow up on payment.
Understanding both the contract and the Act is part of competent practice. These are not separate topics. They work together.
If you want to build real competence in this area, our Full Estimating and Surveying Certificate covers cash flow modelling and payment administration in depth. Our Post Contract Administration programme focuses on the contract administration side, including payment claims and variations.
