What is a good DSO for a contractor?

It depends heavily on your customer mix. Residential service collected at the door can be under a week; commercial and new construction with retainage routinely run past sixty days and sometimes far beyond. Compare against your own terms rather than against an industry figure — if you sell net 30 and your DSO is 55, the gap is the problem regardless of what anyone else runs.

Should retainage be in this?

Include it, but look at the number both ways. Retainage is contractually withheld rather than late, so it does not reflect a collection failure — but it is still your cash sitting in someone else’s account, and on a job-heavy year it can be most of what is outstanding.

What rate should I use for the cost of the money?

If you carry a line of credit or factor invoices, use that rate — it is literally what the delay costs. If you have no borrowing, use what the cash would earn or, more honestly, what you would do with it, which for most growing contractors is worth considerably more than any deposit rate.

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What slow payment is costing you

Money you are owed is money you have already paid for — in materials, in wages, in fuel. Every day it sits unpaid is a day you financed someone else’s business.

Method reviewed by Darren Lim, US CPALicence CPA.74253602

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Days sales outstanding

48 days

You sell on 30 day terms and collect in 48. That 18 day gap is $70,932 of your cash sitting in other people's accounts.

Revenue per day$3,836

Outstanding$186,000

DSO including retainage48 days

DSO excluding retainageThe number that reflects collection rather than contract terms40 days

Cost of carrying it, per yearat 11%$20,460

Per day$56.05

Days beyond your terms$70,932 tied up by lateness alone18 days

Getting to 35 days releasesOne-off cash into the account, not a saving — it is money you already earned$51,753

And saves per yearin carrying cost, every year, permanently$5,693

Every day off your DSO is worthin cash released$3,836

Days sales outstanding, and why the number surprises people

DSO is your outstanding receivables divided by daily revenue — in plain terms, how many days of work you are carrying unpaid at any moment. A contractor doing $1.2M a year with $180,000 outstanding is carrying about 55 days.

The reason it surprises is that it includes everything: the invoice sent yesterday, the one in dispute since March, and the retainage nobody expects until the job closes out. Owners tend to think of the recent ones and forget the tail, which is where most of the cash is.

What the delay actually costs

The obvious cost is interest — if you are carrying a line of credit, unpaid invoices are literally funded by borrowing, and the rate on that borrowing is the price of every day.

The larger cost is usually the one with no interest rate attached. Cash trapped in receivables is cash not buying material for the next job, not funding a hire, and not sitting in the account when a slow month arrives. That opportunity cost does not appear on any statement.

And there is the tail risk: the older an invoice gets, the less likely it is ever collected. An invoice at 90 days is materially harder to collect than the same invoice at 30, which is why ageing matters more than the total.

Reducing it is mostly process, not chasing

Invoice the day the work is done, not at month end. A week of delay at the front is a week of delay at the back, and it costs nothing to fix.

Make terms explicit before the work starts, in writing, including what happens when they are missed. Most late payment is not refusal — it is a process gap on the customer’s side that nobody escalated.

Take deposits and bill progress on anything long. And chase at day one past due rather than at day thirty, when the invoice has already been filed as somebody else’s problem.

Common questions

What is a good DSO for a contractor?: It depends heavily on your customer mix. Residential service collected at the door can be under a week; commercial and new construction with retainage routinely run past sixty days and sometimes far beyond. Compare against your own terms rather than against an industry figure — if you sell net 30 and your DSO is 55, the gap is the problem regardless of what anyone else runs.
Should retainage be in this?: Include it, but look at the number both ways. Retainage is contractually withheld rather than late, so it does not reflect a collection failure — but it is still your cash sitting in someone else’s account, and on a job-heavy year it can be most of what is outstanding.
What rate should I use for the cost of the money?: If you carry a line of credit or factor invoices, use that rate — it is literally what the delay costs. If you have no borrowing, use what the cash would earn or, more honestly, what you would do with it, which for most growing contractors is worth considerably more than any deposit rate.

What we do about it

An aged receivables report every month with anything past sixty days flagged, and retainage tracked separately so it is not quietly forgotten at the end of a job.