Capital Call Provisions: Operating Agreement Essentials for Construction Companies
Don’t Get Blindsided.
Your crew is mobilized for a major project. You've submitted your first invoice to the owner. But the owner won't release the first progress payment for 60 days, citing their own cash flow constraints. Meanwhile, you need to pay your equipment operators, concrete suppliers, and rental companies this Friday. Your line of credit is maxed out. You need $200,000 from your partners immediately, or you'll have to demobilize the crew and lose the job entirely.
You reach out to your business partners: "We need emergency capital. Can you each put in your pro-rata share by Wednesday?" One partner commits immediately. The other goes silent. Three days pass. The partner finally responds: "I don't see anything in our operating agreement that lets you force me to contribute capital. I'm not putting any money in right now. Call me in a few months when I have cash available."
You're stuck. Your company might have strong fundamentals and multiple profitable projects in the pipeline, but you can't access partner capital when you need it. Without clear capital call procedures in your operating agreement, you probably have limited options: rack up expensive short-term debt, demobilize crews and forfeit project margins, or pursue litigation against a partner while your business implodes.
This scenario can play out regularly in construction. And it's far from the only problem that can arise from ambiguous capital call provisions.
Why Capital Calls Matter in Construction
Construction companies face unique capital demands that don't exist in the same way for professional services, manufacturing, or retail.
The Construction Cash Flow Challenge: Construction typically operates on a negative cash cycle. A common scenario: You sign a contract to perform work on a three-month project. You incur costs—labor, materials, equipment—throughout the project. You don't invoice the owner until work is substantially complete. The owner holds payment for 30 days while they inspect the work. They pay you 60-90 days after you completed work. Meanwhile, you paid your subcontractors 30 days after they mobilized, and you paid material suppliers within 14 days of delivery.
This creates predictable cash flow gaps. Every new project starts with a negative cash position that deepens before the first invoice is submitted. Large, complex projects can require hundreds of thousands in working capital before the first payment arrives.
The Bonding Capacity Connection: Surety companies care deeply about your working capital position. They evaluate bonding capacity requests by examining working capital ratios, liquid capital available, and—critically—the stability and unity of company ownership. A company with clearly defined capital call procedures demonstrates to sureties that ownership can mobilize resources quickly if needed. A company where partners dispute capital calls, or where the operating agreement leaves capital contributions ambiguous, signals management weakness and unpredictability to surety underwriters.
When a bonding company sees internal capital disputes in your company's litigation history, or observes that your operating agreement doesn't allow management to make emergency capital calls, they may reduce bonding capacity, decline to increase bonds, or choose not to renew your contract when it expires. This limitation directly impacts your ability to bid and complete larger projects—projects that could drive company growth.
The Bankruptcy Risk: Construction companies with poor capital planning are bankruptcy risks. When you can't meet payroll or can't fund a project through the cash cycle, bankruptcy becomes possible even for companies with strong backlogs and profitable projects. A clear capital call provision (with enforcement mechanisms) allows the company to solve temporary cash flow gaps through partner equity rather than through debt that increases risk.
The Unexpected Emergency Factor: Beyond normal project cash flow, construction companies face unexpected capital needs: a major equipment breakdown during a project, a dispute with an owner requiring legal representation and performance bonding, a bidding opportunity for a large project that requires front-end investment in equipment or mobilization costs, or a safety claim requiring immediate remediation and payment of large insurance deductibles.
How Construction Companies Get Capital Calls Right
What does an effective capital call provision look like for a construction company?
The Multi-Tiered Approach
Many effective construction company operating agreements use a tiered approach that distinguishes between different types of capital needs, matching the urgency of the need with the approval requirement.
Tier One: Routine Working Capital Needs
For routine working capital shortfalls—the normal gaps that arise when invoices haven't been paid yet—the managing member(s) or management team should have authority to make capital calls with notice to other members. The call should:
Be limited to a specified amount per calendar year (e.g., not to exceed $250,000 per calendar year without unanimous consent)
Require written notice to other members specifying the business purpose and timeline for capital contribution
Provide a reasonable timeline for contributions (e.g., 15 business days)
Be callable when the managing member determines in good faith that working capital is needed to meet current obligations
Tier Two: Emergency Capital Calls
For genuine emergencies— equipment breakdown mid-project, critical subcontractor demands, getting a lawyer retained to deal with disaster-response—where delay creates disproportionate harm, the managing member(s) could be given broader authority:
Unilateral authority to make emergency capital calls without member approval
Higher thresholds requiring "emergency determination" (e.g., calls exceeding routine levels automatically trigger the emergency tier)
Obligation to justify the emergency within 5 business days of the call
Limited duration before the emergency call expires unless converted to a routine call through member vote
Tier Three: Major Capital Initiatives
For capital calls exceeding specified thresholds—typically defined as those above $X or requiring more than Y% of annual revenue—the approval requirement increases:
Majority (>50%) or supermajority (66% or 75%) member vote
Presentation of a capital requirement statement explaining the business purpose, timeline, and deployment of capital
Ability for members to propose alternatives (e.g., external financing instead of equity capital calls)
Enforcement Mechanisms for Non-Contributing Members
A capital call is worthless if it can't be enforced. Effective provisions may include:
Dilution Provision: When a member fails to meet a capital call within the specified timeline, their ownership percentage is diluted proportionally. For example:
If a member fails to contribute their pro-rata share of a $100,000 capital call, their ownership percentage is reduced proportionally
A member who owns 25% but fails to contribute their $25,000 share would have their ownership percentage reduced so that the $25,000 they didn't contribute represents their relative ownership reduction
This creates immediate economic incentive to contribute and prevents free-riding members from maintaining full ownership percentages
Debt/Loan Alternative: Instead of forcing dilution, contributing members can loan their share to the non-contributing member:
Members who meet their capital call obligations loan funds to the non-contributing member
The loaned amount bears specified interest (e.g., 8% annually)
The member repays the loan before receiving any distributions, or the loan is repaid from the member's distribution proceeds
This creates a path for members who temporarily lack liquidity to participate in critical capital calls
Forced Buyout: In some agreements, repeated failure to meet capital calls triggers a forced buyout:
After three consecutive failed capital calls, or after failure to meet capital calls totaling more than X% of the company, the other members have the right to purchase the non-contributing member's interest at a specified discount (e.g., 20% discount to book value)
This gives the company a mechanism to remove members who won't contribute capital during critical periods
Third-Party Financing Alternative: To prevent capital calls from being weaponized as squeeze-out mechanisms, the operating agreement can allow any member to propose external financing as an alternative:
If a member determines that external financing (bank loan, equipment financing, line of credit) is available at reasonable terms, the managing member(s) must consider this alternative before making a capital call
This prevents controlling members from forcing inequitable equity dilution when more balanced financing is available
Implementation: What to Do Now
If you're a construction company owner, here's what you can consider:
1. Review Your Current Operating Agreement
Pull your operating agreement and review the capital call language (if it exists). Specifically:
Who can trigger a capital call? The managing member? All members? Majority vote? Unanimous consent?
What notice must be given? How much time do members have to respond?
What happens if a member refuses or can't contribute?
Are there any limitations on capital call purposes or amounts?
Is there a tiered approach based on the size of the call or the urgency?
2. Identify Gaps
Ask yourself:
Could your company face sudden capital needs (project cash flow crises, bonding issues, emergency equipment replacement)?
If your managing member(s) determined emergency capital was needed today, could they actually enforce a capital call? Or would disagreement with another partner tie up your cash access in dispute?
If a minority partner refused to contribute, what would actually happen to their ownership? Are they diluted, or do they maintain their percentage while the company lacks capital?
If you needed major capital, could minority partners block it entirely through veto rights or supermajority requirements?
3. Contact Elkhoury Law
If you don’t think your construction company operating agreement is a DIY project, you can turn to professional help. At Elkhoury Law, we review and revise operating agreement capital call provisions to balance two critical needs: (1) giving your company the flexibility to access partner capital when business needs it, and (2) protecting minority partners against dilution and oppression. Whether you're forming a new construction company, bringing in new partners, or updating an existing agreement, we can help you structure capital call provisions that actually work for your business.
Stay tuned for the next installment of this Operating Agreement Essentials blog series. In the meantime, if you would like a review of your operating agreement, contact Elkhoury Law today!
