HOW TO ACCOUNT FOR WORKING CAPITAL COST IN CONSTRUCTION BIDS — THE FINANCING COST MOST BIDS MISS.
The capital deployed between mobilization and first payment has a cost. If it comes from the LOC, the cost is interest. Most construction bids treat it as absorbed overhead rather than a named project cost. On a 16-month project with a 65-day payment cycle, that absorbed financing cost runs $15,000–25,000.
Including working capital cost in bids is not unusual pricing. It is correctly pricing all costs of the project. Contractors who do it consistently stop subsidizing the payment cycle from their own margin.
WHY THE COST OF MONEY IS A REAL PROJECT COST THAT BELONGS IN THE BID.
Every Project Requires Capital Before Cash Arrives
Every construction project requires working capital from mobilization until the first payment clears. That capital has a cost. If it comes from the LOC, the cost is interest. If it comes from cash reserves, the cost is the opportunity cost. Most bids do not include a line item for working capital cost. The financing is absorbed from project margin.
Monthly Financing Cost on the Average Capital Deployed
Average capital deployed = costs incurred minus collections at midpoint = approximately (monthly cost rate times 1.5 months at 45-day cycle). At 8% annual LOC rate on $120,000 average capital: $120,000 times 8% divided by 12 = $800/month. Over a 6-month project: $4,800. That is a real cost of this specific project. On a 16-month project with a 65-day cycle the number is $15,000–25,000.
Long Projects, Developer Slow Pay, Large Mobilization
Negligible on short projects with fast-paying GCs. Significant on 12–18 month projects, developer-funded work with 65-day cycles, and large upfront mobilization requirements. A $2M project, 16-month duration, 65-day payment cycle: $15,000–25,000 in financing cost that most bids treat as absorbed overhead rather than a named project cost.
THE CALCULATION AND THE LINE ITEM.
The margin protection case: Including working capital financing cost in the bid is correctly pricing all costs of performing the project. A contractor who consistently absorbs $5,000–20,000 per project in LOC interest is underpricing work by that amount. Competitors absorb the same cost. Including it in the bid produces a correctly priced bid.
FREQUENTLY ASKED.
