How Construction SMEs Can Plan Cash Flow Around Progress Claims and Retention

Construction businesses can be profitable on paper and still experience serious cash flow pressure.

A contractor may need to pay workers, subcontractors, suppliers and equipment costs long before receiving the full amount due from a project.

Unlike a retail business where customers may pay immediately, construction companies often receive money progressively as work is completed, assessed and claimed.

This creates a timing challenge.

The company may already have spent heavily on a project while part of the expected revenue is still tied up in progress claims, certification, customer payment cycles or retention arrangements.

For construction SMEs, good cash flow planning therefore requires more than checking whether a project is profitable.

The business also needs to understand when cash will actually come in and when project costs must be paid.

1. Understand why construction cash flow is different

Construction projects can run for months or years.

During that period, contractors may incur costs for:

• Labour
• Subcontractors
• Materials
• Equipment
• Machinery
• Transport
• Site expenses
• Insurance
• Professional services
• Temporary works
• Administrative costs

However, the contractor may not receive the entire contract value upfront.

Instead, payments are often made progressively as work is carried out.

BCA notes that progress payments are commonly made periodically during construction projects because contractors and other parties along the construction value chain often fund their work first and receive payment afterwards.

This means the timing of payments can be just as important as the project margin.

2. Profit does not mean the cash is already available

Consider a simplified project.

Contract value: S$500,000

Estimated total project cost:

S$400,000

Estimated project profit:

S$100,000

On paper, the project looks attractive.

However, imagine the contractor needs to spend:

S$120,000

during the first two months on materials, labour and subcontractors before receiving meaningful project payments.

The company may eventually earn S$100,000 from the project but still need significant working capital at the beginning.

The question is therefore not only:

“Will this project make money?”

It is also:

“Can the business fund the project until the money arrives?”

3. Build a project cash flow forecast before starting

Before committing to a project, construction SMEs can prepare a simple month-by-month forecast.

For example:

Month	Expected Project Costs	Expected Cash Received	Net Project Cash Flow
Month 1	S$70,000	S$20,000	-S$50,000
Month 2	S$90,000	S$60,000	-S$30,000
Month 3	S$80,000	S$100,000	+S$20,000
Month 4	S$70,000	S$120,000	+S$50,000

The project may be profitable overall.

However, the table shows that the company could experience a cumulative cash deficit of:

S$80,000

during the first two months.

That is the amount management needs to plan for.

Without this forecast, the business might accept a profitable project and only discover the working capital problem after work has begun.

4. Understand the progress claim cycle

Construction businesses commonly receive payment through progress claims rather than one final payment at the end of the project.

Under Singapore’s Security of Payment Act framework, a person with a written contract who has carried out construction work or supplied relevant goods or services can make a payment claim in accordance with the applicable requirements. BCA also notes that the payment claim is served according to the period stated in the contract or otherwise agreed in writing.

From a cash flow perspective, the important point is that several stages may exist between performing work and receiving money.

A simplified process could be:

Work completed → progress claim prepared → claim assessed → payment amount established → payment received

Each stage takes time.

An SME should therefore avoid treating the date work is completed as the date cash will arrive.

5. Use realistic payment dates in forecasts

Suppose a contractor completes S$100,000 worth of work during March.

If management simply records:

March cash inflow: S$100,000

the forecast may be unrealistic.

The actual cash may arrive later because the claim still needs to be prepared, submitted, assessed and paid according to the relevant contract and payment process.

A better forecast should use the expected cash receipt date rather than the date the work was performed.

For example:

March: S$100,000 of work completed

April: Progress claim processed

May: Expected cash receipt

Meanwhile, March and April expenses still need to be paid.

This difference can create a substantial working capital gap.

6. Track claims separately from cash received

It helps to distinguish between:

• Work completed
• Amount claimed
• Amount assessed or certified
• Amount invoiced
• Amount due
• Amount actually received

These numbers may not always be identical.

For example:

Work completed: S$120,000

Progress claim submitted: S$120,000

Amount eventually approved for payment: S$105,000

Cash received so far: S$0

If management looks only at the S$120,000 claim, it may overestimate the cash available to support the next stage of the project.

A simple claims tracker can provide a clearer picture.

7. Understand how retention can affect cash flow

Some construction contracts may provide for part of the amount otherwise payable to be retained according to the contract terms.

The exact retention arrangement can vary between contracts.

For this reason, contractors should check:

• Whether retention applies
• How it is calculated
• When amounts may be released
• What conditions need to be satisfied
• Whether there are different release stages
• What documentation is required

From a cash flow perspective, retained money should not be treated as cash that is immediately available.

If S$20,000 remains subject to a contractual retention arrangement, the company may eventually be entitled to that money but cannot necessarily use it to pay today’s suppliers or salaries.

8. Do not build the operating budget around retained amounts

Consider a contractor expecting to receive:

S$100,000

from a project payment.

Suppose the applicable contract arrangements mean only:

S$95,000

is currently received while the remaining:

S$5,000

is retained.

The business should prepare its short-term cash flow using:

S$95,000

as the available amount.

It should not assume the S$5,000 is available simply because it forms part of the broader contract value.

Across several projects, retained amounts can add up.

For example:

Project A retained amount: S$8,000

Project B retained amount: S$12,000

Project C retained amount: S$15,000

Total:

S$35,000

That S$35,000 may eventually return to the company according to the relevant contractual terms, but it cannot support immediate working capital until it is actually received.

9. Track subcontractor and supplier payment timing

Construction cash flow does not depend only on when customers pay.

The company must also understand when money leaves.

Suppose a main contractor expects a progress payment in 45 days.

However:

• Material supplier requires payment in 30 days
• Subcontractor payment is due in 30 days
• Payroll is due at the end of the month
• Equipment rental must be paid weekly

The contractor may therefore have to fund project expenses before receiving the corresponding project income.

This timing gap can become more difficult as the number and size of projects increase.

A project-level forecast should therefore include both customer payment timing and supplier or subcontractor obligations.

10. Growth can make construction cash flow tighter

Winning more work sounds positive.

However, rapid growth can increase the amount of money a construction company needs to fund at any one time.

Imagine a contractor normally handles two projects simultaneously.

It then wins another three projects.

The company may suddenly need more:

• Workers
• Materials
• Subcontractors
• Equipment
• Site supervision
• Transport
• Deposits
• Insurance
• Administrative support

Revenue may rise significantly.

However, many of these costs appear before the additional project cash is received.

The result can be a strange situation where:

the order book becomes stronger while the bank balance becomes weaker.

This is why construction SMEs should assess working capital capacity before accepting every available project.

11. Do not confuse contract value with available cash

A company may proudly announce that it has secured:

S$3 million of projects

That does not mean it has S$3 million available to spend.

The contract value may be earned and collected over many months.

Some work may not yet have been completed.

Some claims may not yet have been submitted.

Some amounts may still be under assessment.

Some cash may be subject to contractual retention.

The business should therefore separate:

Order book

from

Receivables

from

Cash in the bank

These figures answer different questions.

A strong order book can indicate future business activity while the company still experiences short-term liquidity pressure.

12. Watch variation work carefully

Construction projects frequently change as work progresses.

Additional or changed work may affect both project cost and cash flow.

For example, a variation may require:

• Additional materials
• More labour
• Specialist subcontractors
• Extra equipment
• Longer site duration

The contractor may incur those costs before the financial treatment of the additional work is fully resolved.

BCA has previously highlighted the importance of processing variation orders progressively and of contractors providing the necessary supporting documentation for claims.

For SMEs, the practical lesson is simple.

Do not allow significant additional work to disappear inside the general project budget.

Track variation-related costs and claims separately.

13. Keep documentation organised

Good documentation supports both project management and cash flow management.

Construction SMEs may need records such as:

• Contracts
• Purchase orders
• Progress reports
• Delivery orders
• Invoices
• Payment claims
• Payment responses
• Variation documentation
• Site records
• Correspondence
• Supporting cost information

Poor documentation can create delays when a claim needs to be assessed or a payment issue needs to be resolved.

A project may be physically progressing well while the paperwork needed to support payment falls behind.

From a cash flow perspective, administrative discipline matters.

14. Know the role of Singapore’s Security of Payment Act

Singapore’s Building and Construction Industry Security of Payment Act, commonly referred to as the SOP Act, is intended to facilitate cash flow in the construction industry.

BCA explains that a qualifying claimant who has carried out construction work or supplied relevant goods or services under a written contract can make a payment claim under the Act.

Where the claimant disagrees with the response amount or does not receive payment stated in the payment response, the Act provides an adjudication process for eligible disputes.

Adjudication is intended to provide a relatively fast process for determining the amount payable for a claim.

However, this should not be treated as a substitute for good contract administration.

Contractors should still understand their contractual obligations, claim procedures and documentation requirements.

Where a payment dispute involves legal or contractual uncertainty, professional advice may be appropriate.

15. Build a working capital buffer before the project begins

A construction SME should estimate the maximum cash deficit that could occur during a project.

Consider this simplified forecast:

Month	Cumulative Costs	Cumulative Cash Received	Funding Gap
Month 1	S$60,000	S$0	S$60,000
Month 2	S$140,000	S$50,000	S$90,000
Month 3	S$210,000	S$130,000	S$80,000
Month 4	S$270,000	S$230,000	S$40,000
Month 5	S$320,000	S$330,000	No gap

The largest projected gap is:

S$90,000

This gives management a much clearer funding target.

The business can then decide how that S$90,000 will be supported through:

• Existing cash reserves
• Operating cash flow from other projects
• Supplier credit
• Appropriate business financing
• Other available funding sources

The important step is identifying the gap before work begins.

16. Add a delay scenario

Construction forecasts should not assume that every payment arrives exactly when expected.

Suppose the previous project expects a S$100,000 payment in Month 3.

Management should also ask:

“What happens if this money arrives one month later?”

If the delay causes the company’s bank balance to become negative, the project has less financial resilience than the expected-case forecast suggests.

A simple stress test can include:

Expected case

Claims and payments occur broadly as planned.

Delay case

A major progress payment arrives 30 days later.

Cost increase case

Material or subcontractor costs rise by 10%.

Combined stress case

Payment is delayed while project costs increase.

The company does not need to predict every possible problem.

The goal is to understand whether one realistic setback would create a serious cash shortage.

17. Monitor each project separately

Looking only at company-wide cash flow can hide individual project problems.

Suppose an SME has three active projects.

Project A

Healthy margin and payments arriving on time.

Project B

Profitable, but customer payments are slower than expected.

Project C

Costs are rising and several variation items remain unresolved.

Overall company revenue may still look strong.

However, Project C could be consuming cash generated by Project A.

Tracking project-level cash flow helps management identify which jobs are:

• Producing cash
• Consuming cash
• Waiting for payment
• Experiencing cost overruns
• Building up unresolved claims

This information can improve future tendering and project selection decisions.

18. Avoid financing a fundamentally loss-making project

Working capital financing can help bridge timing gaps.

It cannot turn an unprofitable project into a profitable one.

Suppose a contractor expects:

Project revenue: S$500,000

but revised costs have increased to:

S$530,000

The project now has an expected:

S$30,000 loss

Borrowing another S$100,000 may allow the company to continue paying project costs, but it does not remove the S$30,000 underlying loss.

The financing itself also creates an additional cost and repayment obligation.

Before seeking more working capital, management should understand whether the problem is:

Timing

or

Profitability

Those are very different problems.

19. Financing can help with genuine timing gaps

There are situations where a construction company has a sound project but needs additional working capital because costs arise before project payments are received.

For example, an SME may have:

• A secured project
• A reasonable expected margin
• Clear progress payment arrangements
• Reliable project documentation
• A predictable payment cycle

but still need S$100,000 to fund labour and materials during the early stages.

In that situation, appropriate financing may help bridge the timing difference.

Enterprise Singapore’s SME Working Capital Loan under the Enterprise Financing Scheme is intended to support the operational cash flow needs of eligible SMEs. The current maximum loan quantum is S$500,000 per borrower, although applications remain subject to assessment by participating financial institutions.

The availability of financing does not mean every construction company should borrow.

The expected project cash flow should still be strong enough to support the eventual repayments.

20. Ask these questions before accepting another construction project

Before signing the next contract, management can ask:

How much cash must we spend before the first meaningful payment arrives?

Calculate the early project funding requirement.

When are progress claims submitted?

Understand the contractual process.

When do we realistically expect cash to arrive?

Use actual expected receipt dates.

Does retention apply?

Understand the specific contract terms rather than assuming the full claimed amount will immediately become available cash.

When must subcontractors and suppliers be paid?

Compare outgoing payment timing with project receipts.

How much of our current cash is already committed to other projects?

Do not double-count working capital.

What happens if a payment is delayed by one month?

Stress-test the forecast.

What happens if material or subcontractor costs increase?

Check whether the project still has sufficient margin and working capital.

Are variation costs being tracked separately?

Additional work can quietly consume cash.

Is the project profitable or merely large?

Contract value alone does not determine whether the job is worthwhile.

Do we have enough working capital to run several projects at the same time?

Growth can increase cash requirements quickly.

If financing is required, when will the project generate enough cash to repay it?

Borrowing should have a clear repayment path.

Final thoughts

Construction SMEs operate in an industry where the timing of cash can be very different from the timing of work.

A project may be profitable while still requiring the contractor to fund labour, materials, subcontractors and site expenses before receiving enough progress payments to recover those costs.

Retention arrangements, claim processing, customer payment timing and variation work can add further pressure.

This is why construction businesses should forecast project cash flow before work begins and update the forecast throughout the project.

Owners should know how much money is expected to go out, when progress claims will be submitted, when cash is realistically expected to arrive and how much may remain unavailable under the applicable contract terms.

Singapore’s Security of Payment Act provides an important framework aimed at facilitating payment and cash flow within the construction sector, but good financial management still begins inside the business.

By tracking each project’s cash position, maintaining proper documentation, stress-testing payment delays and planning working capital early, construction SMEs can reduce the risk of winning profitable work but running short of cash before the project pays.