Selling indulgences per se was not the main way cathedrals were financed in the Middle Ages, though they certainly had an important role in constructing St. Peter’s. The main source of financing of cathedrals came from the local communities, lay and clerical, that commissioned them. Remember that the rise of the great cathedrals from the late 12th century onward coincided with the rise of towns and the development of a new urban class—people who neither worked, prayed, nor fought, as the traditional medieval concept of the “three orders of society” had it, but people who made money as merchants, bankers, and tradesmen. Cathedral building was a communal undertaking paid for by the contributions of the prosperous people of towns. Cathedrals, in fact, were signs of civic pride. Across much of Europe, towns competed to see who could build the most elaborate cathedral, which usually meant the tallest. (This same mentality--is it phallocentric??--still lives as modern cities compete to see who has the tallest building: New York’s new World Trade Center? Chicago’s old Sears Tower? And the winner is . . . Dubai’s Burj Khalifa.) You can see this civic pride at Chartres Cathedral where various trades commissioned stained glass windows depicting their trade. Such sponsorship was both a mark of secular pride and pious devotion to God.
Even those townsfolk who weren’t rich could gain grace by making donations to cathedral building. Yes, these donations won indulgences, but in the early days of cathedral building—the late 12th-14th centuries—selling indulgences had not yet reached the abusive levels that it would in the later Middle Ages. In fact, very famously there are reports of upper- and lower-class people hauling stones in wagons as a pious act to help rebuild Chartres Cathedral in the late 12th century.
One other side of this: where cathedrals were attached to monasteries, these could use their vast landed wealth to help finance their building, as could the always powerful and wealthy bishops whose church the cathedral was. Most dioceses also demanded a small annual fee from everyone living in the diocese (which was a collection of dozens of parishes) for the upkeep of the cathedral, the “mother church” of the diocese. Using income left as pious offerings at a cathedral’s shrines housing powerful relics of saints could also subsidize building. Remember that cathedrals were the most impressive physical achievement of the Middle Ages; remember also that it typically took several generations from start to finish. (St. John the Divine in NYC was started in 1892; it’s still not finished.)
As for ordinary churches, by which I assume you mean the typical parish church, financing came overwhelmingly from the income from land, since about 90% of medieval people lived not in cities but the countryside. Specifically I mean from tithes. All parishioners were obliged to give annually 10% of their income (mostly agricultural products) to their parish church. Parishioners were also obliged for the upkeep of the nave of the church, that area where they stood at Mass. Their priest was responsible for the upkeep of the church’s chancel, where the main altar was. In towns, parishes were established in neighborhoods. There, folks were also obliged to tithe, but many of them were approaching what we would call “middle class,” so they had disposable wealth that they could invest in pious building. The wealthiest of them could even build private chapels attached to their parish church.
TL,DR: Indulgences as we understand the term at the start of the 16th-century Reformation played a secondary role in building cathedrals and churches.
One good source: Robert A. Scott, The Gothic Enterprise: A Guide to Understanding the Medieval Cathedral (2005). For parish churches a good summary is Richard Kieckhefer’s chapter “The Impact of Architecture” in A People’s History of Christianity: Medieval Christianity ed. Daniel E. Bornstein (2010).
Edit: One more thought. One reason it could take generations to build a cathedral is that sometimes the building stalled when the money ran out due to whatever reasons. Sometimes it took concerted effort to raise more money. When angry townsfolk burned down Laon Cathedral in 1122, the monks there took its relics on the road around the region to collection donations to rebuild it.
Indulgences could be used to finance the building of cathedrals in at least one case. Pope Leo X allowed for the sale of indulgences to finance the renovation of St Peter's Basilica, the act of selling indulgences as part of a way to finance Church activities is one of the points of contention for Martin Luther in 1517 when he nailed the Ninety-Five Theses on the door of the Castle Church in Wittenberg, Germany. Tithes of 1/10 of a person's income as well as the Medieval Church's vast amounts of land and donations from believers in both property and work also helped to finance the Church. Hopefully a more knowledgeable redditor will be able to expand upon this for you.
Edit:
Sorry, Sources:
Justice, Ginny, "The Role of Indulgences in the Building of New Saint Peter’s Basilica" (2011). Masters of Liberal Studies Theses. Paper 7. http://scholarship.rollins.edu/mls/7
For Martin Luther, I am sorry but I do not have a specific source for this other than accumulated knowledge which I know isn't a valid reference for this sub. His contention with the Church comes from the belief in Sola Fide as Justification which means "by faith alone" which come from the belief that God's pardoning of sinners is accomplished by faith alone and not by the "works" of sinners or indulgences. The Catholic Church held that it is God's Grace that provides for this and the Council of Trent (this happened after the 95 Theses) stated that Faith without hope nor charity neither unites a man perfectly with Christ or makes him a living member of His body. Thus faith without works is dead (James 2:17-20). This can be sourced through http://www.ewtn.com/library/councils/trent6.htm.
Please let me know if I need to remove this post.
I looked at this topic a while back as background for current public stadium construction looking to see if there were some things to be learned from the past.
There is a good overview article from Athena review that goes over the entire process. Essentially there is a building fund which gets money from various sources, alms, parishes, bishops funds, relic roadtrips and generally shaking down people for money everywhere.
http://www.athenapub.com/14scholler.htm
A paper; Financing Cathedral Construction: The Political Economy of One Type of Social Overhead Capital http://www.iga.ucdavis.edu/Research/All-UC/conferences/spring-2010/Hohenberg%20paper.PDF
Cathedral building took a long time and “civic unrest, rioting, violence, and bloodshed” were seen while they were constructed. It wasn't always a happy process and not everyone was interested. Further after the cathedral was built everyone couldn't use it equally for instance commoners were barred from burial.
It also gets into the actual costs, along with how many peasants required to support one worker at the jobsite with surplus grain. And compares the costs to events like crusades.
If you are looking for an entire book on the topic try Gold was the Mortar: The Economics of Cathedral Building.