This is a detailed, realistic case study illustrating how a $ 50 M in revenue construction company with a 5% pretax margin and a $2M line of credit can optimize working capital.
Case Study: Working Capital Optimization for a $50M Construction Company
Company Overview
- Industry: Commercial construction
- Annual Revenue: $50,000,000
- Pretax Profit Margin: 5% (~$2.5M pretax profit)
- Employees: 120
- Current Line of Credit: $2,000,000
- Primary Challenge: Chronic cash shortages during peak project cycles, increasing reliance on the line of credit, and delaying vendor payments.
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Problem Summary
Despite generating healthy revenue and a respectable profit margin, the company routinely hits its $2M line-of-credit limit. Root causes identified:
Key Pain Points
- Slow A/R collection — average DSO at 78 days, driven by pay-when-paid structures and incomplete documentation at billing.
- Front-loaded subcontractor and material costs — many vendors requiring net 30 while owners typically paid on net 60–90.
- Inefficient job costing and forecasting — limited visibility into future cash needs creates surprises.
- High WIP underbilling — averaging $3.2M, tying up cash in unbilled earned revenue.
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Diagnostic Process (Working Capital Assessment)
A 4-week analysis identified the following:
A. Accounts Receivable
- Aging showed 22% of invoices over 90 days.
- Root causes: late submission of change orders, incomplete lien waivers, and unclear billing packages.
B. Accounts Payable
The company was paying vendors early (≤25 days) to preserve relationships, but without leveraging early-paying discounts.
C. Inventory & Materials
Excess material stored onsite for multi-month periods, causing waste and unnecessary carrying costs.
D. Job Billing Practices
- Underbilling is caused by project managers who are reluctant to bill ahead of physical progress, even when contract terms allow it.
- Several projects allowed schedule-of-values billing, but PMs were not trained to use it strategically.
E. Cash Flow Forecasting
Only a 30-day cash view, not connected to project pipeline or WIP reporting.
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Optimization Strategy
A. Improve Billing Velocity & Accuracy
Actions:
- Implemented a standardized monthly billing package checklist.
- Trained PMs to pre-assemble documentation 5 days before billing cycles.
- Introduced digital signatures and automated lien waiver tracking.
Impact:
DSO improved from 78 days → 58 days within 120 days.
B. Reduce Underbilling
Actions:
- Implemented weekly WIP reviews with finance + PM team.
- Trained PMs on contractual billing levers (front-loading, mobilization fees, stored materials).
- Aligned incentives partly to cash performance, not just schedule performance.
Impact:
Underbilling dropped from $3.2M → $1.4M, freeing ~$1.8M in working capital.
C. Optimize AP Without Hurting Vendor Relationships
Actions:
- Shifted from paying at 25 days to consistent net-45 (or contract terms).
- Negotiated 2%/20 early-pay discounts for key suppliers and used them selectively.
- Set up a vendor portal to reduce invoice disputes and delays.
Impact:
- Extended payables generated $760K of additional liquidity.
- Early-pay discounts saved ~$90K annually.
D. Improve Forecasting & Cash Management
Actions:
- Built a 13-week cash flow model integrated with WIP, AP, AR, and backlog.
- Instituted weekly review meetings with CFO, Controller, and PMs.
Impact:
- Surprises eliminated; cash reserves stabilized.
- Company reduced line-of-credit usage by 40% in six months.
E. Material & Inventory Control
Actions:
- Tightened purchasing approvals.
- Implemented just-in-time material deliveries on large projects.
- Reduced on-hand material storage.
Impact:
Reduced cash tied up in materials by $350K.
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Financial Outcomes
Before Optimization
- DSO: 78 days
- Underbilling: $3.2M
- AP payment cycle: 25–30 days
- Line of Credit Utilization: 95–100%
- Cash on Hand: often below $350K
After 6 Months
- DSO: 58 days
- Underbilling: $1.4M
- AP average: 43 days
- Line of Credit Utilization: 55–60%
- Cash on Hand: $1.2M+
- Pretax margin improved from 5% → 6.1% (through lower financing costs and fewer inefficiencies)
Total Net Working Capital Improvement:
≈ $3.7M freed and available to the business.
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Strategic Benefits
- The company could now self-fund mobilization on large projects.
- Stronger vendor relationships due to consistent, predictable payments.
- Improved project discipline and finance-operations alignment.
- Ability to pursue larger projects without increasing the line of credit.
- Lower borrowing costs and reduced risk of covenant breaches.
