How to estimate the cash flow of a construction project when collections depend on certifications

In the construction sector, the viability of a project is not measured solely by its accounting profitability, but by its ability to maintain operational liquidity. Many construction companies face cash tensions not due to a lack of profits, but due to the time gap between when execution costs are paid and when certifications are collected. This guide details how to build robust treasury forecasts, adapted to the specific dynamics of the project and the Spanish legal framework on late payments.

The difference between profit and liquidity

It is fundamental to distinguish between accrual accounting and the reality of cash flow. A project may show an excellent margin in the income statement, but if collections arrive months after paying suppliers and labor, the company is left without cash to operate.

This phenomenon is due to three main mismatches:

1. Issued invoices that are not yet cash: an invoice is an accounting income, but the money is only available when the client makes the actual payment.
2. Taxes and social security contributions against the flow: tax obligations (VAT, Personal Income Tax, Social Security) are due based on the invoicing date, not the collection date. This forces companies to advance taxes to the Treasury on certifications that have not yet been collected.
3. Immobilized guarantee retentions: the capital retained in each certification remains blocked until final acceptance, delaying the conversion of profit into liquidity.

The S-curve: dynamics of collections and payments

The typical behavior of cash flow in a construction project follows an S-curve. Understanding this dynamic is key to financial planning:

• Initial phase (0-20% progress): Expenses are high (mobilization, stockpiling, installation) but collections are minimal. The developer or the Public Administration usually makes limited advance payments, which generates a strong consumption of treasury.
• Execution phase (20-80%): Flows stabilize, but the gap between payment to suppliers (typically 30-60 days) and collection of certifications (45-90 days or more) maintains constant tension. This is where the cash runway (days of life of the cash) must be monitored daily.
• Final phase (80-100%): Collections accelerate with final certifications, but guarantee retentions remain immobilized, and demobilization and project closure costs require additional liquidity.

Spanish legal framework: payment terms and late payments

In Spain, treasury management must align with the legislation on combating late payments, which establishes clear limits to protect suppliers:

• Maximum legal term: Typically 60 days from the receipt of the conforming invoice in the private sector. In the public sector, the maximum term is generally 30 days, with exceptions that can extend it to 60 days.
• Late payment interest: Late payment interest is applied, equivalent to the ECB interest rate plus 8 percentage points (approximately 12% annual in the current context).
• Compensation: There is a fixed compensation of 40 euros per unpaid invoice, in addition to collection costs.

For construction companies bidding for public works, the average payment period is not just a statistical data point, but an operational parameter that directly impacts the viability of the offer. The traceability of the electronic invoice via FACe reinforces the importance of controlling the documentary circuit from the first month to avoid administrative delays in collection.

Guarantee retentions: immobilized capital

Guarantee retentions are one of the greatest sources of cash tension. Typically, 5% of the contract value is retained during a period that can exceed 12 months.

Illustrative example: In a contract of 1 million euros, 50,000 euros are retained. After acceptance, 50% (25,000 euros) is released, and the rest (25,000 euros) is maintained until the end of the guarantee period (typically 1-3 years, depending on the contract). For a company with 10 parallel projects, this can mean between 250,000 and 500,000 euros of permanently immobilized capital.

Optimization strategies:

• Bank guarantee: Replace the retention with a bank guarantee. The cost is approximately 1-2% annually, but it keeps liquidity available for the operation.
• Contractual negotiation: Reduce the retention to 3% or agree on early releases by quality milestones.
• Retention register: Maintain a detailed calendar of which retentions are released each quarter and which are pending unclaimed acceptance minutes.

Key KPIs for treasury management

For effective management, metrics must be actionable, frequent, and available by project and consolidated. Essential KPIs include:

How to build a project-by-project treasury forecast

A useful treasury forecast is not made at the company level, but by summing the forecasts of each project. The five components that must be identified in each project are:

1. Expected collections by certification: Estimated amount of each future certification according to the work plan, with its probable approval and collection date. This comes from the cross-reference between planning and actual execution.
2. Guarantee retentions: What is retained in each certification and the expected release date. It is accrued money that does not enter cash.
3. Payments to suppliers and subcontractors: Derived from already committed orders and contracts, not just received invoices. Includes advances and milestone payments.
4. Fixed costs and labor: Payroll, social security, and structure, which do not depend on the pace of the work but on the continuity of the project.
5. Tax obligations: VAT and taxes, with the relevant nuance of VAT charged on certifications not yet collected.

The usual blind spot: The VAT of a certification is declared and paid according to the invoice date, not the collection date. In a project with 90-day payment, this means advancing VAT to the Treasury that has not yet been collected from the client. In large projects, it is one of the greatest cash tensions of the fiscal year and almost never appears in manually made forecasts.

Risk mitigation for delays and work changes

Delays in certifications and contractual changes (amendments) can invalidate forecasts if not managed with agility.

• Real-time visibility: Use tools that centralize information on invoicing, certifications, banks, and projects. Without data connection, there is no real control.
• Stress scenarios: Periodically review scenarios for delays of 30, 60, or 90 days in the collection of certifications. This allows sizing the need for external financing or the rescheduling of payments to suppliers.
• Management of modifications: Additional work is often collected with delay. It is crucial to include a liquidity cushion in the forecast to absorb these gaps without compromising the continuity of the work.

Conclusion

Treasury management in construction is not just another administrative area, but the element that determines whether a project is viable or generates financial problems even if well executed. The key is to anticipate the gap between execution and collection, actively manage guarantee retentions, and maintain real-time visibility of cash flows by project. In a sector where margins are tight and collection cycles are long, precision in treasury forecasting is the difference between continuity and insolvency.