It means your P&L shows net income but your bank account is empty. The gap is usually one of three things: you're billing behind your costs (underbilling), your AR is aging past 60–90 days without collections pressure, or your payables are being paid faster than your receivables are coming in. All three are fixable. None of them show up on the P&L.
Pay-when-paid is a contract clause that makes your payment contingent on your GC getting paid by the owner. It's legal in most states and very common in commercial subcontracting. It means a GC can delay your payment indefinitely — in theory — while claiming they haven't been paid. In practice, it creates 30–60 day payment windows that stack against your payables. Managing it requires disciplined pay app submission, lien rights awareness, and a cash flow forecast that accounts for the delay.
Start with your confirmed AR — every invoice outstanding, the expected collection date, and the amount. Then map your committed outflows week by week: payroll, supplier payments, equipment, insurance, rent. The gap between inflows and outflows, week by week for 13 weeks, is your cash position forecast. Update it every Monday. The value isn't precision — it's seeing a shortfall three weeks before it lands so you have time to act.
Use a line of credit when you have a predictable receivable coming in and a short-term timing gap to bridge. MCAs should be a last resort — they carry effective annual rates of 40–150% and repay daily regardless of your billing cycle. If you're in an MCA, the priority is collecting AR fast enough to pay it off. If you're considering one, it's a signal your cash flow system needs work before you take on more expensive debt.
Job costing is tracking revenue, cost, and margin at the individual job level — not just company-wide. Without it, you know if the business is profitable but not which jobs are making money and which ones are killing you. The contractor who averages 8% net margin company-wide might have some jobs at 15% and others at -3%, and no idea which is which until they close. Job costing is what lets you manage that in real time.
Cost-to-complete is the estimated cost remaining to finish a job. You calculate it by looking at the original budget, subtracting actual costs to date, and then estimating whether the remaining work will come in at, over, or under the original remaining budget. Cost-to-complete matters because it tells you — while the job is still running — whether you're tracking to the original margin or bleeding. If you only look at actual vs. budget, you're looking backward. Cost-to-complete looks forward.
Phase structure should mirror your estimate. If you bid labor in three phases — rough-in, trim-out, punch list — your job cost should track those same three phases. This makes variance analysis meaningful: you can see that trim-out ran 15% over labor while rough-in was on budget. Generic phase structures (just 'labor' and 'material' company-wide) make variance analysis nearly impossible. Match the cost structure to the way you estimate and the way the field reports.
Job cost tracks actual costs on a job. WIP (Work in Progress) is a financial accounting adjustment that reconciles what you've billed vs. what you've earned. If you've billed $400K on a $1M job that's 50% complete, you've earned $500K but only billed $400K — you're underbilled by $100K. WIP reports that as an asset (overbilling would be a liability). Job cost and WIP work together: job cost tells you what jobs are costing, WIP tells you whether your billing matches your earned revenue.
Take your total SG&A (selling, general and administrative expenses) for the year — everything that isn't a direct job cost — and divide it by total revenue. If you spent $400K on overhead on $3M of revenue, your overhead rate is 13.3%. You need to price every job to recover that rate. If you're growing, recalculate quarterly — overhead often grows faster than revenue when you're scaling, and pricing at last year's rate leaves money on the table.
Markup is the percentage you add to cost to get to your price. Margin is the percentage of revenue that represents profit. A 20% markup on $100K of cost gives you a $120K price — but the margin on that job is 16.7% ($20K / $120K), not 20%. Contractors often bid at a 20% markup thinking they're making 20% margin. They're not. This gap compounds on every job and is one of the most common causes of a company that's 'profitable on paper' but never has cash.
It depends heavily on trade and revenue level. Civil and concrete contractors in the $1M–$5M range typically run 12–16% overhead. Electrical and mechanical contractors in the same range run 14–18% because of higher indirect labor costs. As revenue scales toward $10M+, overhead rates typically compress to 10–13% as fixed costs spread over a larger base. The target isn't a universal number — it's your actual rate, known and priced for.
A WIP (Work in Progress) schedule is a monthly report that compares what you've billed on every active job to what you've actually earned based on percentage of completion. Jobs where you've billed more than you've earned are overbilled (a liability). Jobs where you've earned more than you've billed are underbilled (an asset you haven't collected yet). Underbilling is the most common hidden cash flow problem in commercial subcontracting — it doesn't show up anywhere except a WIP schedule.
Underbilling is when you've completed more work than you've invoiced. You've earned revenue you haven't collected yet. It shows up as an asset on a proper WIP schedule but is invisible on a standard P&L. To fix it, submit pay apps on schedule — never let a month close without billing everything you're entitled to. For T&M work, log hours and materials weekly and submit within your billing cycle. Most underbilling is not a billing rights problem — it's a process problem.
Monthly, at minimum. Most GC contracts have a billing cutoff date — typically the 25th of each month — and your pay app needs to be in before that date to make the next payment cycle. Missing the cutoff by a day means waiting an additional 30 days. For larger jobs with significant monthly billing, a one-day miss at 1.5% monthly cost of capital on $200K is a $3,000 error. Build a billing calendar and treat the cutoff date as a hard deadline.
At minimum: P&L vs. prior month and prior year, balance sheet, AR aging (everything over 60 days needs a follow-up plan), AP aging (what's due and when), job cost report for every active job, and a WIP schedule. That's the core six. Add a 13-week cash flow forecast and you have everything you need to run the business without surprises. Most subcontractors look at the P&L and nothing else — which is why they're always surprised.
Gross margin is revenue minus direct job costs (labor, materials, subs, job equipment). Net profit margin is what's left after overhead is also deducted. Gross margin tells you whether your jobs are priced and executed correctly. Net profit tells you whether the entire business is profitable. A contractor with 22% gross margin and 18% overhead runs at 4% net profit. The same contractor with 22% gross margin and 12% overhead runs at 10% net. Gross margin is the job. Net profit is the business.
Retainage is a percentage of each pay app (typically 5–10%) that the GC withholds until substantial completion or project closeout. On a $2M job at 10% retainage, you've got $200K sitting with the GC that won't come back until the job closes. That's real money that needs to be tracked as a receivable and followed up on aggressively at closeout. Many subcontractors forget retainage until months after the job ends — by then, the GC has moved on and collections get harder.
A CPA handles tax compliance, reviewed or audited financials, and year-end reporting. A CFO handles operating decisions: cash flow management, job costing, pricing strategy, overhead rate, financial systems, and monthly accountability. Most subcontractors need both — a CPA for tax and compliance, a CFO (or fractional CFO) for the operational financial work. The mistake is using a CPA as a CFO or going without either. Tax advice once a year is not financial management.
Look past the P&L. A company is operationally profitable if: (1) gross margin is above your trade benchmark, (2) overhead is below your revenue percentage, (3) net profit is positive and growing, (4) your WIP schedule shows more assets than liabilities, and (5) cash is actually building in the account — not just showing on paper. If you have positive net income but the account is flat or declining, there's a working capital problem hiding in the numbers.
When the financial decisions you're making — pricing, overhead, cash flow, credit — are costing you more than a fractional CFO would. Most subcontractors hit that point between $2M and $5M in revenue, when complexity outpaces what a bookkeeper can handle but a full-time CFO isn't justified by the revenue. A fractional CFO at $2,900–$5,500/month gives you CFO-level decision support without the $150K–$250K full-time salary. The question isn't whether you can afford it — it's whether you can afford not to have it.
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