Invoice factoring can work in construction, but subcontractors run into two things most industries never deal with: progress billing and retainage. Many factors will only buy a pay application after the general contractor has approved it, and retainage is commonly left out until it's released and billed on its own. This guide follows one subcontractor pay app from submission to payment, shows which construction receivables are usually eligible, and lists what to ask a construction factor first.
Why progress billing and retainage make construction invoice factoring harder for subcontractors
A typical factored invoice says goods were delivered or a service was finished, and a fixed amount is due on a known date. A subcontractor's pay application bills a percentage of a schedule of values, has to be reviewed and approved up the chain, and can change in amount before anyone pays it.
Factoring is a sale of your receivable, and under the uniform text of UCC 9-404(a) (Cornell LII, checked October 6, 2026), unless the account debtor has made an enforceable agreement not to assert defenses, the buyer's rights are subject to "all terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract." Your general contractor is the account debtor. If the subcontract lets the GC withhold for defective work, backcharges, an unapproved change order or a missing lien waiver, the GC can generally raise the same points against the factor. That list is our reading of the section, which doesn't name those items.
Once the GC receives an authenticated notification that the amount has been assigned and is to be paid to the factor, UCC 9-406(a) says it can discharge the debt by paying the factor and can't discharge it by paying you. Subsection (d) of the uniform text also makes a contract term that bans or requires consent to assigning an account generally ineffective, with listed exceptions, but states enact their own versions, so have a lawyer read any no-assignment clause in your subcontract.
Retainage is a second problem: money you've earned that isn't due yet, with release usually tied to closing out your scope and sometimes the whole project. Factors commonly treat it as ineligible until it's released, though practices vary.
Which construction receivables do factoring companies usually buy?
No official rule sets what a factor must accept, so read this as common practice that varies.
| Receivable | Common treatment | What drives it |
|---|---|---|
| Approved pay application, net of retainage | Most often eligible | The GC has signed off on the amount |
| Pay application submitted but not yet approved | Often ineligible, or funded at a lower advance | The amount can still be cut |
| Retainage still being held | Commonly excluded | Not yet due, and tied to closeout |
| Released retainage, billed after closeout | Often eligible once due and undisputed | It now behaves like a regular invoice |
| Unapproved change orders and claims | Commonly excluded | Open to dispute |
Factoring companies that specialize in construction tend to differ from general factors in the paperwork they'll take on: verifying each pay app with the GC, tracking retainage on its own schedule, working around lien deadlines and talking to sureties. General factors may decline percentage-of-completion billing altogether.
One subcontractor pay app cycle with retainage held back
Picture an electrical subcontractor on a private commercial job. Every figure below is an assumption, and real advance rates, fees and timing depend on the factor and the contract.
Assumptions: a $100,000 pay app, 10% retainage under the subcontract, a factor that buys only the approved net amount, an 80% advance, a fee of 2.5% of the purchased amount for the first 30 days plus 0.5% for each additional 10 days or part of 10 days, and a pay-when-paid clause.
| Step | Day | Amount |
|---|---|---|
| Pay app submitted for work in place | 0 | $100,000 |
| GC approves and holds 10% retainage | 10 | $90,000 approved, $10,000 held |
| Factor verifies with the GC and advances 80% of $90,000 | 12 | $72,000 |
| Owner pays the GC, and the GC pays the factor | 52 | $90,000 |
| Fee for 40 days: 3.0% of $90,000 | 52 | $2,700 |
| Reserve released: $18,000 minus the fee | 52 | $15,300 |
| Total received on this pay app | $87,300 | |
| Retainage still unpaid and unfunded | $10,000 |
The 80% advance works out to 72% of the work billed, because retainage sits outside the purchase. A $2,700 fee on $72,000 outstanding for 40 days is also about 34% as a simple annualized rate. Our guide to factoring rates and fees shows how tiered fees add up.
Now suppose the owner pays the GC 30 days late and the pay-when-paid clause holds. Payment arrives 70 days after funding, the fee climbs to 4.5%, or $4,050, and the reserve released drops to $13,950. On a recourse deal, the factor's buyback date may also be getting close.
How pay-when-paid clauses, lien waivers, joint checks and bonded jobs affect eligibility
Pay-when-paid and pay-if-paid clauses. These tie your payment to the owner paying the GC, which leaves a factor guessing at the due date. State law on them differs, so don't carry one state's rule into another. South Carolina's statute, for one, says payment by the owner to the contractor is not "a condition precedent for payment to the construction subcontractor" and that any agreement to the contrary is not enforceable (S.C. Code 29-6-230; section 29-6-60 lists projects the chapter does not apply to).
On a federal prime contract that carries the prompt payment clause, that clause requires the prime to include a subcontract clause obligating it to pay the subcontractor for satisfactory performance "not later than 7 days from receipt of payment" out of what the government pays (FAR 52.232-27(c), FAC 2026-01). Under the same clause, the government's due date for progress payments is 14 days after the designated billing office receives a proper payment request.
Retainage rules. On federal construction contracts, the contracting officer may retain part of a progress payment to the prime when satisfactory progress hasn't been achieved, and that retainage "shall not exceed 10 percent of the approved estimated amount" (FAR 32.103). Primes and subs can still negotiate retainage between themselves under FAR 52.232-27(d). In Ontario, the Construction Act requires a 10 per cent holdback, and amendments in force January 1, 2026 call for accrued holdback to be paid out after each contract anniversary, with the contractor paying its subcontractor within 14 days of receiving it unless a lien exception applies. Section 87.4 sets transition rules for older contracts.
Lien waivers. GCs usually want a waiver with every pay app, and what you sign affects the leverage behind the receivable a factor is buying. In California, a waiver given for a progress payment when you haven't in fact been paid, or when a check is given in exchange, is "null, void, and unenforceable" unless it's substantially in the statutory conditional form, which is effective only on receipt of payment and leaves retentions unaffected (Cal. Civ. Code 8132). Other states have their own forms and rules.
Joint checks. When a GC pays by a check made out to you and your supplier, part of that pay app was never going to reach you. Factors commonly reduce the eligible amount by the supplier's share or ask for a three-way agreement.
Bonded jobs. The Miller Act requires performance and payment bonds on larger federal construction contracts. The statute's text says more than $100,000 (40 U.S.C. 3131), and FAR 28.102-1 states the current, inflation-adjusted figure: any construction contract exceeding $150,000 (FAC 2026-01). A subcontractor not paid in full within 90 days after its last labor or material may sue on the payment bond, and must do so within one year of that last work. A second-tier sub with no contract with the prime must also give the prime written notice within 90 days of its last work (40 U.S.C. 3133). A payment bond can make your receivable safer, but if you posted your own bond, your surety commonly has rights in the contract funds under its indemnity agreement, and some factors decline those jobs or ask the surety for a written agreement first.
What to ask a construction factor first
- Do you buy progress billings, and what proof of approval do you need?
- Is the advance rate applied to the gross billing or to the amount net of retainage?
- Will you fund retainage once it's released?
- How does the fee run if the owner pays late, and when does recourse start?
- What will your notice of assignment ask my GC to sign, and does it include a waiver of defenses?
- Which lien waivers can I sign before payment, and who tracks lien and bond claim deadlines?
- How do you treat joint check agreements?
- Will you work on bonded jobs, and what do you need from my surety?
- Must I factor every job and every GC, and what are the minimums, term and exit fees?
Get the answers in writing. Our guides to recourse and non-recourse factoring and reading a factoring agreement explain the clauses involved.
When construction factoring fits, and how to compare offers
Factoring fits when your GCs are creditworthy but slow and your pay apps get approved cleanly. It fits poorly when most of what you're owed is retainage or disputed change orders, since factors commonly exclude those. A business line of credit or other construction business financing may suit a retainage-heavy cash gap better, and lenders will assess your credit and repayment ability for those.
EQ Funding is a marketplace and doesn't lend or buy invoices itself. One application for invoice factoring is routed to lenders in the network who compete for it, so you can put the questions above to each offer and compare them side by side. Approval and terms vary by lender.