Holdbacks and prompt payment: closing the contractor cash gap

Construction is one of the few industries where you can be profitable on paper and still struggle to make payroll. Materials, crew and equipment get paid up front, while your money arrives in progress draws, minus a holdback that can sit for months.

How holdbacks work in Ontario

Under Ontario's Construction Act, the owner holds back 10% of the value of the work on each payment. That holdback protects against liens and isn't released until the project reaches substantial completion and the lien period has passed. On a $400,000 job, that's $40,000 of earned money you can't use for months.

Prompt payment rules

For contracts entered into on or after October 1, 2019, Ontario's prompt payment rules set clear deadlines:

• Owners must pay the contractor within 28 days of receiving a proper invoice.
• Contractors must pay their subcontractors within 7 days of being paid.

Several other provinces have introduced their own prompt payment rules, so check what applies where you work. Even with these rules, the gap between spending and getting paid is real, especially when you're growing.

Financing that fits construction cash flow

• A line of credit sized to your draw cycle. Covers materials and payroll between draws, then gets paid down when the draw lands.
• Equipment financing. Keep your cash for operations instead of tying it up in machines. The equipment secures the loan.
• Invoice or receivables financing. Advance funds against approved progress invoices from creditworthy owners and GCs.
• A term loan for one-time needs like a second crew, a yard or a new truck.

What to avoid

Using daily-payment cash advances to cover a holdback that won't release for months. The payments start tomorrow, the holdback doesn't, and the math rarely works.

What lenders want to see

Your contract list or backlog, recent progress billings, and bank statements showing draws coming in. Lenders that specialize in construction understand lumpy deposits. Your advisor will take your file to those lenders, not the ones that see one slow month and say no.