5 Construction Cash Flow Killers Subcontractors Can't Ignore

After years of working closely with construction subcontractors and analyzing the ups and downs of cash flow, we've noticed common pitfalls that can cause even well-established companies to fail. What's particularly striking is how these challenges often intertwine—creating a perfect storm that can sink otherwise healthy businesses.

Common Causes of Cash Flow Problems in Construction: The Five Loss Accelerators

Construction business failure rarely happens overnight. Like a steady drip that suddenly breaks the dam, it typically starts with accumulating losses until a cash crunch delivers the final blow. However, many of the losses are easy to address if you catch them early enough. On the flip side, left unchecked any one of these losses could compound with an unexpected cash crunch resulting in a rather fast death for subcontractors. 

Loss Accelerator #1: Estimation Failures in New Markets

We’ve watched successful subcontractors fall into this trap repeatedly. Here's what's fascinating: established subs rarely fail due to poor estimation when they stay within their core expertise. These companies have typically developed their craft through years of apprenticeship and hands-on experience, using their wisdom to avoid egregious mispricing at the bidding stage. The real danger emerges when they venture outside their lane.

When subcontractors chase new trades or expand into unfamiliar geographies too quickly, they often stumble. Without established relationships to secure labor and materials at reasonable prices, their carefully honed pricing models fall apart. Sometimes, it's the temptation of strategic underbidding—taking a slight loss to break into a new market or build relationships with GCs and Owners. While this approach can be highly successful, it's a dangerous game that requires financial cushioning and smooth execution.

Loss Accelerator #2: The Change Order Cash Trap

Subcontractors often get yanked around by indecisive Project Owners and GCs, leading to extensive rework on unapproved change orders. When jobs are put on hold, they frequently resume without contract adjustments to accommodate for higher material prices, wages, and overhead costs.

This problem compounds in design-build projects, where subcontractors typically begin work with only partial designs, forcing them to price on assumptions that may prove incorrect as designs mature.

The challenge intensifies when subcontractors continue work while change orders remain unapproved, essentially financing the changes themselves. Success requires rigorous documentation of all design versions, verbal directions, and completed work, combined with contract clauses that specifically address design evolution and price escalations. Without these protections, even minor scope changes can cascade into significant profit leaks.

Loss Accelerator #3: The Procurement Gamble

One pattern we've observed repeatedly is subcontractors absorbing material escalations to secure wins with GCs. While this might seem like a smart competitive move, it's essentially placing a bet against supply chain stability and material price inflation.  In today's volatile market, that's an increasingly risky wager. Construction material prices have experienced significant volatility in recent years, with dramatic price swings affecting core materials like steel, copper, lumber, and petroleum-based products.

Successful subcontractors protect themselves through strategic timing of material purchases, strong supplier relationships, and escalation clauses in their contracts. Those who don't often find themselves trapped between fixed-price contracts and rising costs, turning potentially profitable jobs into losses. Specialty contractors are the most vulnerable, especially those working with materials and supplies affected by global supply chain pressures or with long lead times between bidding and installation.

Loss Accelerator #4: The Safety Rating Spiral

Accidents at the jobsite create a devastating chain reaction for subcontractors that extends far beyond immediate productivity losses. When a subcontractor accumulates minor incidents or experiences a single major accident, their insurance premiums spike, immediately inflating overhead costs. This directly impacts their Experience Modification Rate (EMR), the crucial safety metric that determines their ability to win future work.

The financial damage spreads quickly across their entire portfolio. On projects without wrap-up insurance (non-OCIP/CCIP jobs), subcontractors must build these higher premiums into their bids, making them less competitive. Even worse, a weakened EMR score can trigger automatic disqualification from premium projects and certain GCs' bidder lists altogether. What starts as a safety incident often ends with a subcontractor priced out of their core markets, watching profitable operations turn to losses.

Loss Accelerator #5: Project Management Breakdown

Here at Constrafor, we’ve seen this scenario play out numerous times: a subcontractor with an excellent reputation takes on too many projects simultaneously and stretches their operations too thin. Without robust systems and adequate staffing, quality inevitably suffers. 

In the worst cases, poor project management leads to subcontractors being removed from jobs entirely—a devastating outcome that cascades beyond immediate profitability. When this happens, unpaid requisitions pile up while GCs apply hefty back-charges, creating a severe cash crunch that can cripple even well-established companies.

Early Warning Signs of Cash Flow Problems

While these five loss accelerators can sink a business, they rarely catch savvy contractors completely off guard. In our years working with subcontractors, we've identified clear warning signs that typically appear before a cash crunch hits. By spotting these indicators early, you can address problems before they start to irreversibly impact project profitability:

• An Increasing number of unapproved change orders
• Rising material costs without contract adjustments
• A sudden spike in insurance premiums
• Quality control issues across multiple projects
• Delayed payments on completed work
• Increasing rework requests
• Strained supplier relationships from late payment

Heeding the Warnings

The difference between companies that weather these challenges and those that don't often comes down to how quickly they spot and address problems. Most contractors we work with have encountered at least one of these issues—it's not about avoiding them entirely, but rather catching them before they spiral.

If you're seeing any of these warning signs in your business, don't wait for them to compound. Successful contractors know that early intervention is key. At Constrafor, we help subcontractors identify these issues early and implement systems to prevent them from becoming critical. Ready to protect your business from cash flow problems? Contact our team to learn how we can help you stay ahead of these challenges.