Holdbacks in Ontario Construction: Why They Matter More Than Most Contractors Think

For construction companies, a strong backlog and a growing pipeline usually look like good news. More work means more revenue, more opportunity and, ideally, more profit. But construction businesses also know that growth can put a surprising amount of pressure on cash flow, especially when a larger share of working capital becomes tied up in receivables, Work in Progress (WIP) and holdbacks.

Holdbacks are a normal part of the construction industry in Ontario, but they are often treated as an administrative detail rather than something to actively manage. For a growing contractor, that can be a mistake. Holdbacks affect cash timing, how WIP is interpreted, and ultimately how much capital the business needs to finance its projects.

Under Ontario’s Construction Act, a payer must generally retain a 10% statutory holdback on the value of services and materials supplied under a construction contract or subcontract. The intent is to protect parties further down the construction chain who may have lien rights. From the contractor’s perspective, however, the practical impact is straightforward: work can be completed, revenue can be earned, and costs can be incurred, while a portion of the cash remains unavailable.

On a $500,000 project, a 10% holdback is $50,000. On a $5 million project, it is $500,000. When a contractor is managing several projects at once, those balances add up quickly. The company still has to fund payroll, suppliers, equipment, insurance, overhead and other operating costs while waiting for that cash to be released.

Ontario also changed its holdback rules beginning in 2026. For contracts subject to the new regime, accrued statutory holdback must generally be released annually rather than held until the end of a long-term project. That is an important change for contractors involved in multi-year work because it can reduce the amount of capital tied up for extended periods. It also places greater importance on project administration, because contract anniversaries, release dates, lien periods and subcontractor payments need to be tracked properly.

Contractors can’t simply negotiate away the statutory holdback, but they can and should review many related contract terms closely. Additional contractual retention, billing frequency, progress-payment milestones, change-order approval, documentation requirements, dispute provisions and payment terms can all materially affect cash flow. A project can have an attractive gross margin and still place significant pressure on the business if the billing and payment terms are poor.

This is where holdbacks become closely connected to WIP reporting.

A WIP schedule is intended to help management understand how much work has been completed, how much revenue has been earned, how much has been billed and whether the project is currently overbilled or underbilled. Those numbers are related, but they are not interchangeable. Holdback adds another layer because a contractor may have properly billed for the work and earned the revenue while still being unable to collect the full amount.

For example, assume a contractor has a $5 million project with estimated total costs of $4 million. At a certain point, $2.4 million of costs have been incurred, meaning the project is approximately 60% complete. Based on those estimates, roughly $3 million of revenue has been earned, and the project has generated approximately $600,000 of gross profit to date.

If $3 million has been billed and a 10% holdback applies, approximately $300,000 may still be sitting in holdback receivable rather than being available as operating cash. The project may be performing exactly as expected from a profitability perspective while still creating a significant financing requirement for the company.

This is also where accounting systems and WIP reporting can create confusion if they don’t track holdbacks separately. If the accounting records effectively treat only the immediately collectible portion of the invoice as the amount billed, management may see an apparent underbilling position even though the company has actually billed the work correctly. The difference may simply be sitting in holdback receivable. When holdbacks, trade receivables and true unbilled WIP are lumped together, it becomes much harder to understand why cash is tied up and whether there is an operational issue on the project.

For that reason, contractors should be able to clearly distinguish between regular accounts receivable, holdback receivable and true unbilled amounts when reviewing WIP. True underbilling can point to delayed invoicing, unapproved change orders, missed milestones or project administration issues. Holdback represents a different issue: the amount has generally been billed, but the cash is not yet available.

This becomes increasingly important as contractors move into larger and longer-term projects.

Canada’s current investment in defence infrastructure is a good example. The federal government has committed to significantly higher defence spending, including substantial investment in military facilities and infrastructure. In March 2026, National Defence said it expected about $59 billion in defence infrastructure spending over the next decade. Defence Construction Canada also reported awarding more than 1,000 contracts valued at approximately $2.6 billion in fiscal 2024–25.

Ontario contractors are already seeing some of that activity. Major projects include a new $98 million facility for the 21 Electronic Warfare Regiment at CFB Kingston and a roughly $37 million Transition Centre at CFB Borden, along with ongoing infrastructure investment at locations such as Trenton, Petawawa, Kingston, Borden and Ottawa.

For construction businesses, these opportunities can be significant, but larger projects also tend to come with more complex contract administration, longer project schedules, more subcontractors and a greater need for working capital. Federal defence projects can also operate under procurement and contractual frameworks that differ from typical Ontario private-sector construction, so contractors need to understand the specific terms of each opportunity rather than assuming the same rules apply across every project.

The broader financial lesson is the same regardless of whether the customer is a private developer, municipality, institution or federal agency: winning a large project creates a financing obligation for the contractor.

As construction companies grow, that financing requirement can become one of the biggest constraints on the business. A contractor that moves from $10 million to $20 million in annual revenue may expect profitability to improve, but it may also find that significantly more cash is tied up in WIP, receivables and holdbacks. At the same time, payroll grows, material purchases increase, equipment needs expand and overhead often has to be added before the additional project cash is collected.

That is why businesses should model the cash-flow impact of a project before they sign the contract, not simply calculate the expected margin. Management should understand how often the project can be billed, how quickly invoices are expected to be paid, how much will be held back, when that holdback is expected to be released and whether the company has enough working capital to support the project in the meantime.

The same analysis should continue throughout the life of the project. Holdback balances should be reviewed as part of the monthly WIP process, with management understanding how much is outstanding, which projects it relates to, when it is expected to be released and whether anything is delaying collection. Individually, a $50,000 holdback may not appear significant. Across ten projects, that becomes $500,000 of working capital that is unavailable to fund the business.

Construction contracts are often reviewed carefully for scope, scheduling, liability and operational risk. They should also be viewed as financial documents. The payment structure of a contract determines how much of the project a contractor will effectively have to finance and for how long.

As opportunities continue to grow in infrastructure, institutional construction and sectors such as Canadian defence, that discipline will become even more important. The strongest projects are not simply the ones with good margins. They are the ones where the contractor understands how the work will affect profitability, WIP and cash flow from the day the contract is signed until the final holdback is collected.