Factoring for Construction Contractors

Why construction receivables are different

In most industries an invoice is a simple claim: goods were delivered or a service was performed, and the customer owes a fixed amount. Construction billing rarely works that way. A subcontractor bills monthly against a schedule of values for the percentage of work completed. The general contractor (GC) rolls those requests into its own pay application to the owner, the owner's architect or lender reviews it, and money flows back down the chain only after each level approves. Part of every payment is held back as retainage until the project, or a phase of it, is complete.

Each of those features creates a reason for the GC or owner to pay less than the invoice face value: a disputed percentage of completion, a backcharge for cleanup or delay, a missing lien waiver, or a pay-when-paid clause that ties your payment to the owner paying the GC. Factors price and structure construction deals around that dispute risk. Many factors decline construction entirely, and the ones that specialize in it tend to have narrower eligibility rules than general invoice factors.

Who factors construction invoices

Construction is the industry where the fewest factors compete, because retainage, pay-when-paid clauses and lien rights make the receivable harder to buy. None of the 43 factors we've profiled makes construction its primary business, and six name it as one of several. 1st Commercial Credit publishes 0.69% to 4% with advances that vary by industry and a $10,000 monthly minimum. Far West Capital, a bank-owned factor with offices in El Paso, Houston and Austin, says it funds "harder industries like energy or construction" and accepts customer concentrations up to 100%. Viva Capital advertises advances up to 98% on non-freight invoices from a 0.25% starting rate with no minimum volume. Factoring Express markets a contractor program with advances up to 97%, no contracts and no minimums, and America's Factors lists construction among its industries with month-to-month options and non-recourse programs. Apex Capital also lists construction, though its business is overwhelmingly trucking. Construction-only specialists exist; we have not profiled one yet, so the table below shows only companies whose terms we could verify.

The documents behind a construction invoice

A factor that works in construction will want to see the paper trail that supports each billing:

• The subcontract or purchase order, including payment terms, retainage percentage, pay-when-paid or pay-if-paid language, and any clause restricting assignment.
• The pay application. On many commercial jobs this is a form showing the schedule of values, work completed to date, stored materials, retainage held and the amount currently due. The factor advances against the current amount due, not the contract value.
• Change orders. Only executed change orders are normally eligible. Pending or verbal change orders are treated as disputed until signed.
• Lien waivers. Conditional waivers are typically submitted with each pay request, and unconditional waivers once payment is received. The factor will want waivers coordinated so you never waive rights on money that has not actually reached the factor.
• Bond information. On bonded public work, the factor wants to know who the surety is and whether the GC is bonded.
• Joint check agreements, if a GC or owner pays you and a supplier jointly, or pays you and the factor jointly.

Expect the factor to verify each billing directly with the GC, sometimes by calling the project manager to confirm the percentage complete before funding.

Retainage and why it is usually excluded

Retainage is the portion of each progress payment the paying party holds until completion. On federal contracts, FAR 32.103 says retainage should be used only when a contractor is not making satisfactory progress, should not exceed 10 percent of the approved estimated amount, and must be paid promptly once all contract requirements are complete. Private contracts and state rules vary and often set retainage as a flat percentage from the first pay application.

Factors generally do not advance against retainage. A guide from a construction factoring provider explains that construction invoices typically carry 5% to 10% retainage, that factors usually do not finance it because of dispute risk and slow payment, and that most factoring agreements do not let an invoice remain unpaid for more than 90 days. The advance is calculated on the invoice net of retainage.

In practice, that means a subcontractor's retainage balance can grow to a significant sum over a long project with no financing available against it. Plan for that in your project cash budget before you bid.

Pay timing on public and private jobs

On federal construction, the Prompt Payment Act rules in FAR 32.904 make progress payments due 14 days after the designated billing office receives a proper payment request, with final payments on the 30-day rule. Subcontractors on those jobs are protected by 31 U.S.C. 3905, which requires the prime's subcontracts to provide for paying subcontractors within 7 days of the prime receiving payment from the agency, with interest on late amounts. That statute also allows the subcontract to hold back retainage, with written notice to the subcontractor and a copy to the government.

Federal jobs above certain sizes also come with payment protection. Under FAR 28.102-1, performance and payment bonds are required for construction contracts over $150,000, and contracts over $35,000 but not over $150,000 require two or more alternative payment protections. For a subcontractor, a payment bond is a backstop if the GC fails, and factors view bonded public work as lower credit risk on that basis.

Private commercial work has no single federal timetable. Payment depends on the contract, the owner's financing, and state prompt payment and lien laws, which differ significantly. State pages such as Texas and Florida describe local conditions.

What construction factoring costs

Construction pricing runs a little higher than general commercial factoring because of the dispute and delay risk. The provider guide cited above reports average advances of 75% to 85% of the invoice net of retainage, with fees typically ranging from 1.5% to 2.75% per 30 days on a tiered structure. It also lists eligibility conditions that are typical of the segment: subcontractors and material suppliers rather than GCs, commercial rather than residential customers, and a monthly invoicing minimum of about $50,000.

Two features push the real cost up. First, construction invoices often take longer than 30 days to pay, so a per-30-day rate is charged two or three times. Second, a short-paid pay application leaves an unfunded balance that the factor will charge back. Model your expected days-to-pay honestly in the factoring calculator, and assume some invoices will be reduced.

How factors evaluate a contractor

Specialist construction factors usually focus on:

• Position in the payment chain. Subcontractors and suppliers billing a GC are the usual clients. GCs billing owners directly are harder to fund, because owners' payment depends on lender draws and architect sign-off.
• The GC's payment history. The factor is underwriting the GC, so a GC known for slow pay or heavy backcharges will get a low limit.
• Bonding. Many factors avoid funding contractors who have their own performance bond on the job, because a surety that steps in after a default may claim the contract proceeds. A bonded GC above you is generally a positive.
• Residential versus commercial. Homeowner receivables are rarely eligible.
• Clean lien and tax status. Existing liens on receivables, unpaid payroll taxes or open cash advances usually must be resolved first.

Clauses and practices that cause trouble

Pay-when-paid and pay-if-paid

A pay-when-paid clause delays your payment until the owner pays the GC. A pay-if-paid clause can make the owner's payment a condition of your getting paid at all, depending on state law. Factors read these clauses closely because they turn a sound invoice into a contingent one. Non-recourse coverage almost never applies to nonpayment caused by these clauses.

Joint checks

When a check is made payable to you and a supplier, or to you and the factor, every payee must endorse it. A factor that is new to construction can stall for days over a joint check. Ask how the factor handles them and whether it will work directly with your suppliers.

Backcharges and offsets

A GC may deduct the cost of cleanup, delay or rework from your payment. Under UCC 9-404, the factor takes your receivable subject to the terms of your contract and to defenses arising from the same transaction, so backcharges reduce what the factor collects and become your liability under a recourse agreement.

Lien waiver timing

Signing an unconditional waiver before money actually clears can cost you lien rights if the payment never arrives. Coordinate waiver forms with the factor so that conditional waivers accompany pay applications and unconditional waivers follow confirmed receipt.

Anti-assignment language

Some subcontracts prohibit assignment of payments. The UCC generally makes such terms ineffective against an assignment of accounts, but public contracts can have their own rules, and the GC may still resist. Raise assignment with the GC early. For the federal side, see the page on government contractor factoring.

When factoring does not suit a contractor

Factoring works best for subcontractors and suppliers billing creditworthy GCs on commercial work, with modest retainage and few disputes. It is a weak fit when:

• most of your money is tied up in retainage, which factors will not fund;
• your work is residential or billed directly to owners;
• you carry your own performance bond, which can complicate a factor's position;
• the real gap is mobilization cost before the first pay application, which factoring cannot fund because no receivable exists yet.

Alternatives include a bank line of credit secured by receivables, SBA working-capital programs, negotiating mobilization payments or lower retainage, and supplier credit terms aligned with your pay cycle. The factoring vs. line of credit guide compares cost and control.

Frequently asked questions

Can I factor retainage?

Usually not through a standard construction factoring agreement. Factors advance against the current amount due on a pay application, net of retainage, because retainage is not payable until completion and is frequently reduced by punch-list disputes. A few specialty lenders fund retainage balances separately, but expect more documentation, a lower advance and a higher cost than for progress billings.

Do general contractors qualify for construction factoring?

Some factors work with GCs, but many limit construction factoring to subcontractors and material suppliers. A GC's receivable depends on the owner's lender releasing a draw and the architect certifying the work, which adds layers of risk. GCs with strong public-sector or institutional owners have better odds than those billing private developers.

How do lien waivers work when I factor?

You still provide conditional lien waivers with each pay application. The difference is that payment goes to the factor, so your unconditional waiver should be issued only after the factor confirms it has received the funds. Agree on a waiver process with the factor at setup, and make sure your GC knows where payment must be sent.

Will a GC accept a notice of assignment?

Most commercial GCs will process it, though some resist because it adds steps to their payables. Under the UCC, a customer that has received proper notice must pay the factor. Introducing the factor early, before the first pay application, and confirming that the GC's accounting team has updated the remit-to details prevents most problems.