Cash flow while you perform: what every new contractor should know

Winning the contract is the goal. Surviving the wait to get paid is what separates the contractors who last from the ones who fold after their first big award. Federal work often carries a real gap between when you incur costs, labor, materials, subcontractors, and when the money arrives. Understanding that gap and the tools that bridge it is essential before you sign, not after payroll is due.

Know the payment timeline you are actually facing

The Prompt Payment Act requires an agency to pay a proper invoice within 30 days of receiving it, or 30 days after accepting the work. On construction, progress-payment invoices are generally due within 14 days. Those are the legal rules. The practical reality is that 30 to 45 days is typical once you add billing-cycle time, and first invoices on a brand-new contract can stretch to 60 or 90 days while the government sets you up in its payment system. Counting mobilization and billing, the full gap from incurring a cost to seeing cash often runs 30 to 90 days. If payment does run past 30 days, interest accrues automatically in your favor, but interest does not help you make Friday’s payroll.

Reduce what you have to front

The best cash-flow strategy is to need less cash out of pocket in the first place. On many fixed-price contracts you can request progress payments as work is completed rather than waiting for final delivery, which pulls cash forward. Some contracts allow performance-based payments tied to milestones or deliverables. A smaller number allow advance payments for startup costs. Which of these is available depends entirely on what the contract permits, which is one more reason to read the payment terms before you bid, not after you win.

The Assignment of Claims Act

When you do need outside financing, the legal foundation is the Assignment of Claims Act, codified for federal contracts at FAR Subpart 32.8 and 31 U.S.C. 3727. It lets you assign your right to receive payment under a government contract to a financing institution, typically a bank, so the lender is repaid directly from the contract proceeds. That assignment reduces the lender’s risk, which is what makes contract-backed lending possible for a small business that a bank might otherwise consider too new. The assignment generally must cover all unpaid amounts and go to one named party, though that party can act as agent for several financing participants.

SBA-backed working capital

The Small Business Administration offers products designed for this exact problem. A Contract CAPLine is a working-capital line of credit, secured by your contract receivables, that finances the direct labor and material costs of a specific contract. The SBA also runs a 7(a) Working Capital Pilot, a more flexible line of credit aimed at small-business contractors. These take planning and paperwork, but they tend to cost far less than emergency options.

Invoice factoring, with eyes open

Once a valid invoice exists and you simply need the cash faster than the government will send it, invoice factoring lets a commercial lender advance you most of the invoice value now for a fee, typically a few percent. It is more expensive than a bank line, so it is best reserved for genuine timing gaps rather than routine funding. Weigh the fee against the alternative of missing payroll or defaulting on a subcontractor, and it can be the right call.

The habits that matter most

Two practices protect you more than any financing product. First, keep a cash reserve; a common rule of thumb is 60 to 90 days of contract operating expenses in reserve. Second, establish a business line of credit before you need it, because a bank is far more willing to extend credit to a healthy business than to one that is suddenly stretched, and an unused line costs nothing until you draw on it. Plan your financing before the award lands, map your options in advance, and you can act fast when the contract arrives. Planned capital is almost always cheaper than emergency capital.