Knowledge · Finance
Construction working capital,
the money locked in the build.
Every open job holds a slice of the builder’s own capital between paying for work and being paid for it. This reference is about that locked-up capital, what ties it up, how much a build actually holds at its peak, and why working capital, not the order book, is the real limit on how many jobs a builder can run at once. It is the standing level of money committed to building, distinct from the cash cycle and the cash flow forecast.
01 / Overview
What working capital is, and what it is not
Working capital is the capital a building business has locked inside its open jobs at a point in time. Concretely, it is the value of work built but not yet paid for, plus claims lodged and not yet collected, plus retention the client is holding on the builder, offset by the deposits and advances clients have already paid and the supplier and subcontract balances the builder has not yet paid out. Netted together, that is how much of the builder’s own money is tied up funding the gap between paying for work and being paid for it.
The distinction that makes this page worth its own reference is the difference between a level and a flow. Construction cash flow is the flow, the movement of money in and out over time, and it answers whether there will be enough in the account when the trades fall due this fortnight. Cash flow forecasting projects that flow forward to find a future gap. Working capital is the level, the standing amount of the builder’s capital committed to the operating cycle at any moment, and it answers a different question: how much funding does the business need to carry its book at all. A builder can have healthy cash this week and still be dangerously light on working capital for the volume being run.
Why it matters
Working capital is the number that decides how big a builder can safely be. Because each open job locks up its own slice of capital, and those slices add together, the working-capital requirement of the whole book is what the business has to fund, whatever the order book says it could build. Run short of it and the constraint that stops the next job is not sites or trades or work; it is money. This is the standing capital underneath the survival story told in the cash flow reference, and the operator’s version of the same truth is blunt: you can be profitable, busy and out of money at the same time, and working capital is where that happens.
02 / The components
What ties up a builder’s working capital
Three things lock capital into a job and three things offset it. The net of the six, summed across every open job, is the working capital the business actually has to fund.
Work in progress
Every stage built but not yet claimed and paid is the builder’s own money sitting in the job as labour and materials. Between paying the trades and collecting the claim, that value is capital the builder has advanced to the client, and it is the largest single component of the working capital a build ties up.
Receivables
Claims that have been lodged or approved but not yet paid are money earned and not yet in the account. The payment terms and any assessment or bank-drawdown delay set how long each claim stays as a receivable, and every day it does is a day the builder’s capital funds the client.
Retention held on the builder
Where the contract allows the client to retain a slice of each claim until after completion or the defects period, that money is earned, owed and locked up, sometimes for a year or more past handover. It is working capital the builder cannot touch and often forgets to count.
Deposits and advances (the offset)
A deposit taken at signing, and any payment ahead of the work, are the client funding the builder, which reduces the capital the builder has to find. Deposits are a genuine offset to the working-capital requirement, which is exactly why treating one as profit quietly removes the buffer it was meant to be.
Supplier and subcontract terms (the offset)
The days between receiving materials or trade work and paying for them are days the builder is funded by the supply chain. Longer supplier terms shrink the working-capital gap; short terms widen it. The gap is the difference between the terms given to clients and the terms taken from suppliers.
Retention held on trades (the offset)
Retention the builder holds on subcontractors is a future outflow, but until it is released it also offsets the capital tied up in the job. It has to be tracked as a coming obligation, not banked as free cash, or its release surprises the position.
The point of listing the offsets alongside the locked-up items is that working capital is a net figure, not a gross one. Deposits and supplier terms are the supply chain and the client funding the builder, and they genuinely reduce the capital the builder has to find, which is why the deposit spent on an older job and the seven-day supplier terms accepted without negotiation both quietly enlarge the requirement. The committed cost position is where much of the locked-up side becomes visible earliest, because a commitment is money spoken for before it is spent, and the retention and payment terms decide how long each dollar stays on the wrong side of the gap.
03 / The shape
How much a build ties up, and when
The capital a single job ties up is not constant; it breathes across the stages. It is lowest just after a deposit lands or a claim is paid, when the client has funded the builder ahead of the next block of work, and highest in the middle of a stage, when the trades and materials for that stage have been paid but the claim for it has not yet been collected. That mid-stage peak is the moment the job holds the most of the builder’s money, and it is the number that matters, because the business has to be able to fund the peak, not the average.
Now sum that peak across every job running at once. Three homes mid-stage do not average out; their peaks can land in the same fortnight, and the working-capital requirement of the book is the total of the peaks, not a comfortable mean. This is the calculation most builders never do. They know their turnover and their margin, but not the peak capital their book requires, which means the funding line, the buffer and the growth plan are all guesses. The way to know it is to model each open job’s position and add them, and then to hold enough capital, or committed funding, to cover the total with room to spare. Any single figure quoted as a rule of thumb is illustrative only; the real number is specific to the book.
04 / Where it fits
Why working capital caps capacity
Working capital is the internal version of a limit the outside world also enforces. Because each concurrent job adds its peak requirement to the pool, the pool sets how many jobs can run at once, and when it runs dry the next job cannot be safely started no matter how much else is available to build it. Growth makes this sharper rather than easier: every new job consumes capital before it returns any, so a business can win its way into a working-capital hole with a full order book, and the deposits that arrive with the new work flatter the bank balance while deepening the real requirement.
The same capital position is what home warranty insurers, financiers and accountants read when they decide how much work a builder may carry, which is the Open Job Value mechanism. A business whose working capital is thin, whose claims run late and whose retention is uncounted presents weaker numbers than the same business run tightly, and is sized down accordingly. So working capital is both the internal ceiling on how much a builder can build and the evidence the outside world uses to set that ceiling from the outside. The applied disciplines for holding the position through a contraction are in building through a downturn, and the feasibility layer that should price the capital cost of a job before it starts is in build cost feasibility.
05 / The levers
The levers that free up working capital
None of these is sophisticated. Each one either turns locked-up work back into cash sooner or stops capital being tied up by accident, and together they set how much of its own money a builder has to hold.
Move the deposit and claim timing earlier
The single biggest lever. Every claim lodged the day the stage completes, rather than at month-end, converts work in progress back into cash sooner and shrinks the capital tied up in the job. A claim that slips a week does not just delay one payment; it enlarges the working-capital requirement of every job running that pattern.
Manage terms in both directions
The working-capital gap is the space between what the client owes and what the builder owes suppliers. Negotiating longer supplier terms while claiming promptly narrows that space; accepting short supplier terms while giving clients generous ones widens it. Both sides are negotiable, and usually only one gets negotiated.
Track and release retention deliberately
Retention held on the builder is capital to chase the moment it is due, not to forget. Retention held on trades is an outflow to schedule, not to spend. A retention ledger that names the amount, the trigger and the date at both ends stops locked-up money from becoming lost money.
Price working capital into growth
Each additional concurrent job adds its own peak working-capital requirement, so growth consumes capital before it returns any. The lever is to plan the capital a new job will lock up before winning it, so the business grows into its funding rather than discovering the hole after the deposits are spent.
06 / Australian considerations
Deposits, retention trusts and GST timing
Several features of the Australian regime change how much capital a build locks up and for how long. The points below are labelled by evidence class, differ by jurisdiction, and change over time, so confirm the current source before relying on any of them. None of this is financial or legal advice.
- Legislation. Domestic building legislation in most states and territories caps the deposit a builder may take and requires progress payments to be stated in the contract and proportionate to work performed. Because the deposit is an offset to the working-capital requirement, the cap effectively sets a floor under how much of the early work the builder must fund. The caps and thresholds differ by jurisdiction, so check them where the job is built.
- Legislation. Some jurisdictions operate retention trust or project bank account schemes that require retention money to be held in trust rather than used in the business. Where such a scheme applies, retention the builder holds on trades cannot be treated as free cash even informally, which tightens the working-capital position. Application depends on the jurisdiction and the contract; confirm the current source.
- Government guidance. GST timing affects working capital at the margins, because the GST on a progress claim and the GST on supplier invoices fall due on their own timetable through the BAS, and a mismatch can lock up or free up cash for a period. The treatment depends on the contract and the accounting basis, so keep it consistent and confirm it with your accountant against current ATO guidance. The mechanics are covered in GST and BAS for builders.
- Industry best practice. Because working capital is the limit that both caps capacity internally and shapes how insurers and financiers size the builder, keeping the components visible, work in progress, receivables, retention at both ends, is part of the financial visibility a well-run building business maintains, not an occasional exercise.
07 / Common mistakes
Where working capital goes wrong
Most working-capital trouble comes from counting it wrong rather than from a genuine shortage. The money is there or it is not, but the position that was read said something the balance sheet did not.
Reading the bank balance as working capital
A healthy balance can hide deposits belonging to unbuilt work and retention owed but not yet collected. The bank balance is a moment; the working-capital position is what is genuinely free once every advance and every locked-up receivable is accounted for.
Spending the deposit
A deposit reduces the capital a job requires, so spending it on an older job removes that buffer and leaves the newest client funding the oldest problem. The deposit was working capital doing its job; treating it as income undoes it.
Forgetting retention at both ends
Retention held on the builder that nobody chases after defects liability ends, and retention held on trades that surprises the position when it falls due. Both ends are working capital with a date, and both quietly distort the position when the date is not tracked.
Growing faster than the capital allows
Winning more work feels like strength while every new job locks up more capital before returning any. A full order book with no working-capital plan is how a profitable, busy builder runs out of money, which is the failure pattern the insolvency data keeps showing.
Confusing profit with free capital
A job can be profitable and still have all of its margin, and more, tied up in work in progress and retention. Profit is not cash until the capital funding it is released, and mistaking the two spends money that is still locked in the job.
No number for the peak requirement
Most builders can state their turnover but not the peak working capital their book actually requires. Without that number, the funding line, the growth plan and the buffer are all guesses, and the first stress test comes at the worst possible time.
08 / Best practice
How experienced builders manage it
The operator’s observation is that working capital is a number to know, not a feeling to have. The builders who scale without a scare are the ones who can state the peak working capital their book requires and who hold funding to cover it with room to spare, so a slow-paying claim or a stalled drawdown is absorbed rather than fatal. They claim every stage the day it completes, because the fastest way to free capital is to stop lending it to clients through late claims. They count retention at both ends and chase it on the day. And they price the capital a new job will lock up before they win it, so the business grows into its funding instead of discovering the hole once the deposits are spent. The contract type is part of this too, because a cost-plus job reimburses actual cost and can tie up capital differently from a fixed price, and a disputed claim heading for adjudication is locked-up capital with a clock on it.
Where software fits the workflow
Working capital is hard to see because its components live in different places, the built-not-billed value on site, the receivables in the ledger, the retention in the contract, the commitments in the cost report. In VIABUILD the cost position and progress claims run on one understanding of the job, so the value built but not yet claimed, the claims lodged and not yet paid, and the retention owed at both ends can be read as one position rather than assembled by hand across systems. The builder still makes every funding call; what changes is that the peak requirement is a number the business can see instead of a surprise it meets.
09 / FAQ
Common questions.
Working capital is the capital a building business has tied up in the day-to-day machine of building at any given moment, chiefly the value of work built but not yet paid for, plus claims lodged and not yet collected, plus retention owed to the builder, offset by the deposits and advances clients have paid and the supplier and subcontract balances not yet paid out. In plain terms, it is how much of the builder’s own money is locked inside open jobs, funding the gap between paying for work and being paid for it. It is a level, or a stock, measured at a point in time, which is what distinguishes it from cash flow, the movement of money over time. A builder needs enough working capital to carry the peak gap across all open jobs at once, and running short of it is one of the most common ways a busy, profitable builder gets into trouble.
They are two views of the same money problem and it is worth keeping them separate. Cash flow is the flow, the timing of money in and out, and it answers whether there will be enough in the account when the trades fall due this fortnight. Working capital is the level, the amount of the builder’s own capital locked up across all open jobs at a point in time, and it answers how much funding the business needs to carry its book at all. Cash flow forecasting projects the flow forward to spot a future gap; working capital sizes the standing capital the business must hold to keep building. A builder can have healthy cash this week and still be dangerously light on working capital for the volume being run, which is why both numbers are needed. The cash cycle is covered in the construction cash flow reference and the forward view in cash flow forecasting; this page is about the standing capital underneath both.
There is no single figure, and this page quotes none as a benchmark, because it depends on the contract’s deposit and claim structure, the payment terms in both directions, whether retention applies, and how promptly the builder claims. The shape is more useful than any number: the capital tied up in a job is lowest right after a deposit or a paid claim and highest in the middle of a stage, when the trades for that stage have been paid but the claim for it has not yet been collected. That mid-stage peak, summed across every job running at once, is the working-capital requirement the business actually has to fund. The way to know it for a specific book is to model each open job’s position and add them, rather than to reach for an industry rule of thumb.
Because every concurrent job locks up its own slice of the builder’s capital, and those slices are additive. Three homes mid-stage means three peak gaps funded from the same pool at the same time, and the troughs do not politely stagger themselves. When the pool runs dry the constraint is not the order book, the site capacity or the trades; it is the money, and the next job cannot be safely started even though everything else is available to build it. This is the same limit that home warranty insurers and financiers are testing when they set how much work a builder may carry, the Open Job Value mechanism, so working capital is both an internal ceiling and the evidence the outside world uses to size the builder.
Yes, in opposite directions, and both are commonly misread. A deposit is the client funding part of the work up front, so it reduces the capital the builder has to find, which is precisely why spending it removes a buffer rather than banking a profit. Retention works the other way: money the builder has earned but the client holds back until after completion or the defects period is working capital locked up, sometimes for a year or more, and it is routinely left out of the builder’s own reckoning. Retention the builder holds on its own trades sits in between, a future outflow that offsets the position until it is released and then leaves. Counting all three properly is most of the difference between a working-capital number that is real and one that is optimistic.
The levers are mechanical, not clever. Claim every stage the day it completes, so work in progress turns back into cash sooner. Manage terms in both directions, taking longer where suppliers allow it and claiming promptly from clients, so the funding gap is designed rather than accidental. Track retention at both ends and chase it the day it is due. And price the working-capital requirement of a new job before winning it, so growth is funded rather than discovered. None of these is sophisticated, and together they are the difference between a book the business can fund and one it cannot. In a downturn the same levers matter more, because the buffer is thinner and the cost of running short is higher.
10 / Terms
Glossary for this topic
Working capital (the capital tied up in open jobs at a point in time, a level rather than a flow), work in progress (the value of work built but not yet claimed and paid), receivables (claims earned and not yet collected), retention (money withheld until after completion or defects liability, at both ends of the chain), deposit (the up-front client payment that offsets the requirement), peak working capital (the highest capital a job or a book ties up, the number that must be funded), committed cost (money spoken for before it is spent), Open Job Value (the externally set ceiling on how much work a builder may carry). The wider vocabulary lives in the construction glossary.
The natural next reads are construction cash flow for the timing of the same money, and cash flow forecasting for projecting the position forward.
11 / Keep reading
Related knowledge, guides and features
12 / Further reading
Primary sources
- Your state or territory’s building regulator, for the deposit caps and progress payment rules that set how much early work a builder must fund, and for any retention trust or project bank account scheme that applies.
- Australian Taxation Office , for current guidance on GST timing for progress payments, which affects working capital at the margins.
- Your accountant and financier, for sizing the peak working capital your book requires and the funding to cover it. This page is general information, not financial advice.
Know the capital your book locks up before it runs short.
VIABUILD holds the cost position, the claims and the retention on one understanding of the job, so the money built but not yet billed, owed but not yet paid, and held but not yet released can be read as one working-capital position rather than guessed.