Construction Factoring: Unlocking Working Capital for Commercial Subcontractors
Commercial construction presents some of the most challenging cash flow conditions in the economy: general contractors commonly enforce "pay-when-paid" or "pay-if-paid" clauses, project owners routinely withhold 10% retainage, and billing cycles stretch 60 to 90 days.
Standard factoring companies often avoid construction due to mechanic's lien complexities and progress billing disputes. However, specialized construction factoring companies exist specifically to underwrite construction receivables.
Key Elements of Construction Factoring
- AIA G702 / G703 Verification: Advances are issued against architect-certified Applications and Certificates for Payment (AIA Documents G702 and G703).
- Advance Rates: Typically 70% to 80% of the approved billable progress amount (lower than other industries due to 5%–10% statutory retainage deductions).
- Lien Waivers & Supplier Joint Checks: The factor coordinates with material suppliers to ensure mechanic's lien releases and conditional progress lien waivers are executed cleanly.
- Payroll Funding: Enables subcontractors (HVAC, electrical, plumbing, masonry, roofing) to fund weekly union or non-union labor without falling behind.
Handling Retainage
Most construction factors fund the current active billing portion and exclude the 10% retainage until final project closeout and substantial completion punch-lists are signed off.