Working capital in construction and infrastructure: why it goes wrong and how to fix it

Costs run ahead of income

In construction and infrastructure you pay for almost everything up front. Materials, subcontractors and wages go out of the door before the work is handed over, while the client only pays per building stage or on completion.

That difference in timing is the heart of the working capital question in this sector. The bigger the project, the bigger the amount you have to pre-fund, and the longer it takes to come back. Run several projects at once and that pre-funding stacks up.

Slow payers make it worse

Payment terms in the sector are long, and on projects and public contracts often longer still. You can deliver perfectly on time yourself, but as long as the client only pays after 60 days or per completed stage, you carry the gap.

This hits healthy businesses just as hard as those in trouble. In fact it is precisely the firm with a full order book that runs into the limits, because every new contract has to be pre-funded all over again.

Why the bank is often not the answer

A bank facility has a fixed ceiling. That ceiling was set on your position back then, and it does not move with the projects you are winning now. Grow fast and you hit the limit, exactly when you need the headroom most.

On top of that, many construction firms already have their security lodged with the bank. Receivables, plant, sometimes property. That blocks additional finance, even when the business is healthy. What the approach for this sector involves is set out on construction and infrastructure.

How you fix it

For the day-to-day working capital question, factoring is often the logical route. You turn your stage and project invoices into working capital straight away, instead of waiting on the client. The funding line grows with your projects, so a bigger job or a busy spell is absorbed without renegotiating with the bank every time.

If your security is tied up at the bank, a step is needed before that. A business loan buys out the bank position, which releases the pledges. After that you combine that headroom with factoring on your invoices. That way you keep a grip on your liquidity, even when a client pays late.

What it comes down to

The working capital squeeze in construction and infrastructure arises because your costs run ahead of your income, made worse by long payment terms. Factoring closes that gap by turning project invoices into working capital straight away. If your security still sits with the bank, a business loan frees up the headroom first. Often the combination is the strongest answer.