CONSTRUCTION BACKLOG CASH REQUIREMENTS — HOW MUCH WORKING CAPITAL DO YOU NEED?
Backlog is not the same as working capital. A $4M backlog of signed contracts is a commitment to perform work — not cash in the bank. Before the first pay app clears on any of those contracts, you are paying crews, buying material, deploying equipment, and running overhead. The question to ask before signing any contract is not "can we do this work" — it is "can we fund this work until first payment arrives."
Most subcontractors sign contracts based on whether they want the work and can perform it. The working capital analysis — how much cash the project requires before first payment, and whether that cash exists — rarely happens before signing. It happens at week six when the LOC is maxed and payroll is due and the first pay app is still two weeks from clearing. This page covers how to calculate backlog cash requirements before you sign.
HOW TO CALCULATE WORKING CAPITAL REQUIREMENT BEFORE SIGNING.
Identify the Mobilization Period
The mobilization period is the time from first day on site to first payment received. On a commercial project with monthly billing and a 45-day pay-when-paid cycle, that is roughly 75 days — 30 days of work before first billing, 45 days for the GC to pay. On a public project with a 90-day pay cycle it is 120 days. Know the mobilization period for each project before signing.
Calculate Weekly Cash Burn
Weekly cash burn on a project is labor cost per week plus weekly material deliveries plus equipment charges plus your pro-rated weekly overhead allocation. On a $600K electrical project running 20 weeks, a typical weekly burn is $18,000–$28,000 depending on the phase. Multiply by the mobilization period weeks to get total cash requirement before first payment.
Compare to Available Working Capital
Available working capital is cash on hand plus available LOC minus committed draws on other active projects. If Project A needs $180,000 in mobilization cash and your available working capital is $220,000 — you can fund it with $40,000 to spare. If Project A needs $180,000 and three other projects are already drawing on $200,000 of your $250,000 LOC, you cannot fund it without either collecting outstanding AR or securing additional credit before mobilization.
If this project requires $311,000 in working capital before first payment and your available LOC plus cash is $280,000 — you have a $31,000 gap. Identify it now, not at week six. Solutions: accelerate collection on outstanding AR before mobilization, negotiate a mobilization payment at contract signing, or arrange an LOC increase before the project starts.
WHEN MULTIPLE PROJECTS START SIMULTANEOUSLY — THE MATH COMPOUNDS.
The working capital analysis gets more complex when multiple projects mobilize in the same 30-day window. Each project has its own peak working capital requirement and its own mobilization period. The peak of the combined working capital requirement — when all projects are in their early mobilization phase simultaneously — is what needs to be compared to available resources, not the requirement of each project individually.
FREQUENTLY ASKED.
