Managing Working Capital Cycles in Construction & Engineering
Smart Supplier Terms for a Stronger Cash Conversion Cycle
In construction and engineering sector, where projects are capital-intensive and payment schedules are often staggered, optimizing working capital is vital to ensure operational continuity and financial resilience. At the core of this challenge is the cash conversion cycle (CCC). This is the time it takes to convert project investments into cash flows.
One strategic lever that contractors and developers can use to shorten this cycle is negotiating smarter terms with suppliers. Done right, it allows firms to better manage cash outflows, avoid costly short-term borrowing, and improve project execution without compromising on vendor relationships.
An Abstract Illustration Depicting Rising Performance Within Complex and Demanding Construction Operations
Why Working Capital Matters in Construction
Construction firms often operate with long project timelines, phased billing, and high upfront costs. This creates a mismatch between expenditures and receivables, leading to tight liquidity unless carefully managed.
Common working capital challenges include:
Delays
In progress billings and milestone payments
Advance Payments
To subcontractors and suppliers
High Requirements
For inventory materials and equipment
Unforeseen Delays
In projects that are impacting receivables
Working capital optimization is not about cutting corners, it’s about timing cash flows strategically across all stakeholders involved.
Supplier Terms: A Key Working Capital Lever
Suppliers are integral to every construction and engineering project. The terms agreed upon during procurement such as payment schedules, credit periods, and delivery milestones can significantly affect your company’s liquidity and project efficiency.
Smart supplier negotiation strategies may include:
Extended Payment Terms
Without incurring penalties or strained relationships
Just-In-Time Delivery Arrangements
To reduce storage costs and avoid tying up cash in excess inventory
Performance-Based Payment Releases
Tied to project milestones
Consolidated Purchasing Agreements
for bulk or multi-project discounts
These adjustments can stretch cash without increasing debt, reduce the CCC, and align financial planning with actual construction timelines.
Practical Strategies for a Stronger CCC
Improving the cash conversion cycle in construction projects requires a coordinated approach across finance, procurement, and operations:
Map Cash Flow
Across the entire project lifecycle, from procurement to final billing
Segment Suppliers
By strategic importance, negotiating longer terms with high-volume, low-risk vendors
Use Project-Based Financing Tools
Such as invoice discounting or supply chain financing
Review Contract Structures
Ensuring payment milestones reflect actual cash needs
Monitor Accounts Actively
Such as payables and receivables, ensuring collections don’t lag behind material purchases
The Role of Digital Tools and ERP Integration
Digitalization offers practical solutions to manage working capital in real-time. A cloud-based ERP system with project accounting capabilities enables:
Accurate Tracking
Of payables, receivables, and inventory
Automated Alerts
For overdue invoices and upcoming obligations
Real-Time Reporting
On cash positions at the project and company level
Scenario Modeling
For supplier terms and their impact on liquidity
This transparency empowers project managers and finance heads to make informed, timely decisions that preserve working capital.
Why It Matters to Contractors, Developers, and Financiers
More than just a financial best practice, optimizing working capital is a competitive advantage. For engineering and construction firms, it supports:
Stable Project Execution
Even with tight payment schedules
Stronger Margins
Through efficient cash use and fewer borrowing costs
Supplier Trust
And improved creditworthiness
Better Investor & Lender confidence
Especially in capital-heavy infrastructure projects
In construction and engineering, delays and liquidity gaps can derail even the most technically sound projects. By embedding working capital strategy into supplier terms and project financing, firms can build financial resilience, improve execution, and strengthen long-term sustainability.
Finance strategies that go beyond compliance.
Let's make cash work smarter across the project lifecycle
Construction Industry Authority of the Philippines (CIAP) – Policies on procurement standards, contract structures, and compliance in engineering projects
