Top 3 business mistakes we see general contractors make
General contracting is a thin-margin, slow-cash business where small structural errors compound quickly. These three account for most of what we see go wrong.
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Mistake 1: Buying equipment in the way that costs the most capacity
A GC needs a telehandler. Cash is available. Buying it outright feels conservative. For a bonded contractor it is often the most expensive option there is. Bonding capacity is generally a multiple of working capital, often around ten times. Working capital is current assets minus current liabilities. Cash is a current asset.
Same machine. Five times less damage.
Simplified illustration ignoring interest and offsetting asset treatment. Surety practice varies; confirm with your agent and CPA.
The rule for a bonded GC: when you finance construction equipment, match the term to the asset life and keep the current portion small. The interest you pay is almost always cheaper than the bonding capacity you would otherwise give up.
Mistake 2: Letting receivables age past ninety days
Surety underwriters commonly exclude receivables aged past ninety days from working capital entirely. Not discount. Exclude. A $400,000 receivable at day 89 supports your bond program. At day 91 it supports nothing, while still being money you are owed.
Construction runs some of the longest collection cycles of any industry, with commercial projects averaging well over eighty days to subcontractor payment and retainage of roughly 10% held until completion. Survey work has found only about 12% of construction businesses are consistently paid on time, and nearly one in five have missed payroll because of it. So drifting past ninety days is the default unless somebody fights it:
- Run an aging report weekly. Know on day 60 which invoices are heading for day 91.
- Escalate before the cliff. A call at day 70 is a conversation. A call at day 120 is a collection.
- Treat lien rights as a calendar. Preliminary notice deadlines are unforgiving, and preserving the right costs nothing.
- Negotiate retainage reduction at 50% completion. Many contracts allow it and most contractors never ask.
- Price slow payers accordingly. Slow payment is a cost of doing business with a specific counterparty, and it belongs in the bid.
Mistake 3: Confusing volume with profit
This is the one that ends companies. General contracting is a pass-through business. A GC bidding $20 million of work is handling mostly subcontractor and material cost and keeping a thin slice: typically 12% to 16% gross and 5% to 8% net for well-managed firms, with nonresidential net margins measured near 4%.
At a 4% net margin, a $10 million contractor keeps $400,000. Growing to $20 million means carrying roughly twice the receivables, twice the retainage, twice the payroll exposure, and twice the bonding requirement, all to keep $800,000, assuming nothing goes wrong on any job.
One bad project erases the entire increase.
What competent operators watch instead of revenue: gross profit dollars per employee, working capital turnover, profit fade job over job (sureties scrutinize this specifically), debt to equity (sureties commonly prefer it below 1.0), and backlog quality, meaning margin and counterparty rather than dollar volume.
The common thread
All three mistakes come from optimizing the wrong number. Buying with cash optimizes for looking debt-free. Tolerating slow receivables optimizes for client relationships. Chasing revenue optimizes for a figure that sounds like success at a trade association dinner.
The number that actually governs a general contractor is working capital, because it sets bonding capacity, and bonding capacity sets what you are allowed to bid.
The bottom line
Protect working capital, chase receivables before day ninety, and grow on margin rather than volume. Our companion piece on business credit and bonding capacity for GCs works through the arithmetic in more detail.
Frequently asked questions
Is it better for a general contractor to buy equipment with cash or finance it?
For a bonded contractor, financing is usually better. Bonding capacity is generally a multiple of working capital, and a cash purchase removes the full amount from working capital immediately, whereas a financed purchase only puts the next twelve months of principal into current liabilities. On a $120,000 machine at a ten times multiplier, that difference can be roughly a million dollars of bonding capacity.
Why do receivables over 90 days matter so much to contractors?
Because surety underwriters commonly exclude them from working capital entirely rather than discounting them. A receivable that supports your bond program at day 89 supports nothing at day 91, even though you are still owed the money. Given that construction payment cycles routinely run past eighty days, that cliff is reached by default unless receivables are actively managed.
What profit margins should a general contractor expect?
Well-managed general contractors commonly run gross profit around 12% to 16% and net profit around 5% to 8%, with nonresidential net margins measured closer to 4%. Because general contracting is largely a pass-through model, revenue growth alone does not improve financial strength.
How can a contractor increase bonding capacity?
Increase working capital and protect it: structure equipment debt over longer terms so the current portion stays small, collect receivables before they age past ninety days, negotiate retainage reduction where contracts allow it, retain earnings rather than distributing them, and improve the quality of financial statements, since larger bond programs generally require reviewed or audited statements.
What is profit fade and why do sureties care?
Profit fade is the pattern of jobs finishing at lower margins than they were estimated at. Surety underwriters scrutinize it because it suggests estimating or project management weakness rather than bad luck, and a consistent pattern can limit bonding capacity even when the company is profitable overall.
Want equipment structured around your bond program?
Tell us what your surety looks at and we will build the note so it protects capacity instead of consuming it. Or run the numbers yourself first in the Quote Builder. No credit pull, no obligation.
This article is general information about commercial equipment financing and is not tax, legal, or financial advice, nor a commitment to finance. All figures are illustrative examples, not offers or quotes. All financing is subject to credit approval and underwriting. Rates, terms, and approval depend on the complete business and credit profile.