How Do Government Contractors Get Paid? (And the 98% Rule)

By Sean & Doug Reitmeyer — GCExperts. Written from real contractor conversations, calls, and workshops.

A contractor called me after watching one of my videos. "You said don't bill 100%, bill 98%." He wanted to understand why. That question is the whole secret of getting paid on federal work, so let me answer it out loud.

First, the honest difference between federal and private. On a lot of private commercial work, you're waiting on insurance checks and mortgage sign-offs. A contractor I talked to laid it out: insurance pays in 30 to 45 days, and if there's a mortgage involved, add another 60 or 90. On average, he waits 45 to 60 days with his money already out the door for labor and material. The federal government doesn't do that to you. Public money follows public rules, and the rules say the government pays its invoices on a schedule — fast enough that if you bill correctly, the check chases you instead of the other way around. That alone changes your whole cash position.

Now the 98% rule. When you finish a federal job, the government doesn't hand over the final dollar right away. It holds back a piece of the contract value — a retainage — until closeout, until the warranty period ends, until every paper is stamped. So here's the trap: if you bill 100% of the work and you've already spent 100% of the money, you're the bank for the government's holdback. You financed their warranty.

The trick is to bill 98% and make sure your price is built so that 98% covers your actual costs and profit. Then the last 2% — which the government is going to hold anyway — is money you can afford to wait for, because it was never load-bearing. You get paid on 98, they hold 2, and when that final check eventually comes, it's a bonus instead of a lifeline.

The bigger lesson: on federal jobs, cash flow is a design problem, not a luck problem. You design your price, your draw schedule, and your final billing so the government's rules work for you instead of against you. Contractors who complain the government is slow with money are usually the ones who planned to float the government's warranty with their own cash. Don't be the bank. Bill 98.