Profit is not cash: the contracting company trap

Contracting P&Ls can look healthy while the bank account empties. The culprits: retention held by clients, advance payments already spent, and work-in-progress that’s earned on paper but months from invoiceable.

The fix isn’t complicated finance — it’s a weekly cash view that tracks what’s actually collectable in the next 30/60/90 days against committed outflows: payroll, suppliers, GOSI, rent.

Owners who see this one page weekly stop being surprised. Owners who only see an annual P&L get surprised exactly once a year — at the worst possible time.

Where the money actually is

Take a contractor running SAR 12 million a year. The P&L shows a net profit of SAR 1.1 million. The owner is pleased. Then payroll week arrives and there is SAR 180,000 in the account against a SAR 340,000 wage bill.

Nothing is wrong with the accounts. The profit is real. It is just sitting in three places that are not the bank:

• Retention. Typically 5–10% of every certified invoice, held by the client until the defects liability period ends — often a year after handover. On SAR 12 million of turnover that is SAR 600,000 to SAR 1.2 million parked somewhere you cannot spend it.
• Work in progress. Costs incurred on site that have not yet been certified. You have paid the labour and the material. The client has not yet agreed the measurement.
• Receivables that have aged past their terms. Thirty-day terms mean nothing if the payment certificate takes six weeks to sign.

Why advances make it worse, not better

An advance payment feels like relief. It arrives early, it clears the account, and it funds mobilisation. The trouble is that it is not income — it is a liability you have already spent.

What happens next is predictable. The advance funds the first two months. By month three it is recovered against certified work, so the certificates come in lighter than expected. Meanwhile the cost base has grown to match the mobilised site. Cash falls off a cliff precisely when the project looks healthiest on paper.

If your advance recovery is not shown as a separate line in the cash forecast, you will be surprised by this every single time.

The one page that fixes it

You do not need project accounting software or a finance team. You need one page, updated weekly, with two columns.

On the left, what is genuinely collectable in the next 30, 60 and 90 days — certified and invoiced, certified and not yet invoiced, submitted and awaiting certification. Retention goes at the bottom, dated to when it is actually releasable, not when you would like it.

On the right, what must go out over the same horizon: payroll, GOSI, subcontractors, material accounts, rent, VAT, and any advance recovery already scheduled.

The number that matters is the gap in week six. If it is negative, you have five weeks to act. That is enough time to chase a certificate, delay a material order or arrange a facility. Finding out in week six itself is not.

What we see when it goes wrong

The pattern is consistent. A contractor takes a bigger job than the last one and the working-capital requirement scales faster than the margin does. A project at SAR 4 million might tie up SAR 700,000. The same margin on SAR 10 million ties up nearly SAR 2 million — and the profit on the earlier job was already spent.

The business is not failing. It is growing faster than its cash can carry, which looks identical from the inside until a payroll is missed.

What to do this week

Ask your accountant for a list of every retention balance with the date it becomes releasable. If that list takes more than an hour to produce, it has not been tracked — and untracked retention has a way of quietly never being claimed.

Then ask for aged receivables split by certification status, not just by invoice date. An invoice that has not been certified is not thirty days old. It has not started ageing yet.