Construction Cash Flow Management: The Complete UK Guide

Cash flow problems kill more construction businesses than bad workmanship ever will. According to the Federation of Master Builders, late payments cost UK construction SMEs an average of £25,000 per year in lost productivity, admin time, and financing costs. One in five construction businesses cite cash flow as their biggest challenge—ahead of finding skilled labour.

The brutal reality: you can be profitable on paper and still go bust. A £500,000 project with 15% margin looks great—until you're waiting 90 days for payment while your suppliers want paying in 30.

This guide breaks down practical cash flow management strategies for UK builders—from payment terms that actually protect you, to forecasting methods that prevent nasty surprises.

Why Cash Flow Matters More Than Profit

Here's a scenario every builder knows: You've just finished a £80,000 extension. The client's delighted. You've made a healthy 20% margin. On paper, you're £16,000 up.

But the client's paying in stages, and the final £30,000 won't land for another 45 days. Meanwhile:

• Your plasterer wants paying this Friday (£3,500)
• The merchant account is due (£8,000)
• HMRC wants their quarterly VAT (£12,000)
• Wages are due next week (£6,000)

That's £29,500 going out before your £30,000 comes in. If you don't have reserves, you're scrambling—despite being "profitable".

The 5 Cash Flow Problems That Kill Builders

1. The Payment Gap

You pay suppliers in 30 days. Clients pay you in 60-90 days. That gap has to come from somewhere—usually your reserves or an overdraft you're paying interest on.

The fix: Structure payment schedules so client payments arrive before supplier payments are due. More on this below.

2. Retention Imprisonment

5-10% retention held for 6-12 months is standard in construction. On a £200,000 project, that's £10,000-£20,000 you've earned but can't touch. Multiply that across several projects and you've got serious capital locked up.

The fix: Factor retention into your cash flow forecast as "unavailable". Don't count it until it's released. Some builders negotiate retention bonds instead of cash retention.

3. Variation Chaos

Client asks for changes mid-project. You do the work. Then spend three months arguing about whether it was included in the original quote. Meanwhile, you've paid for materials and labour out of pocket.

The fix: Variation orders signed and priced before work starts. No signature, no work. Simple.

4. The Lumpy Income Problem

Construction income is inherently lumpy. A big payment lands, you feel flush, you take on costs. Then nothing for six weeks and you're sweating.

The fix: Separate your "operating account" from your "tax and buffer account". When big payments land, immediately move VAT, tax provisions, and a buffer amount to the second account. Only spend what's left.

5. Underpricing to Win Work

Tight margins mean no room for error. One delay, one price increase from suppliers, one comeback—and your profit evaporates. Worse, you've tied up your time and cash in a project that's now costing you money.

The fix: Know your true costs (including your time) and stick to your margins. Walking away from bad jobs is a cash flow strategy.

Payment Terms That Actually Protect You

Your payment terms are your first line of defence. Here's what works for UK builders:

Stage Payments (The Gold Standard)

Break every project into payment stages tied to completion milestones. For a typical extension:

Key principle: Never have more of your money in a project than the client does. If you've spent £40,000 on a project, you should have received at least £40,000 from the client.

Payment Timeframes

For stage payments: payment due within 7 days of milestone completion. Put this in your contract and stick to it.

For smaller jobs or day rates: payment on completion or within 14 days.

Important: Under the Construction Act, you have the right to suspend work for non-payment (after giving notice). Use this right if needed—it's there for a reason.

The Late Payment Clause

Under the Late Payment of Commercial Debts Regulations 2013, you can charge:

• Interest at 8% above Bank of England base rate
• Fixed compensation: £40 (debts up to £999), £70 (£1,000-£9,999), or £100 (£10,000+)

Include this in your terms. You might not always enforce it, but it gives you leverage.

Simple Cash Flow Forecasting (No Spreadsheet Degree Required)

Cash flow forecasting sounds complicated. It isn't. At its core, you're answering one question: "Will I have enough money to pay what I owe, when I owe it?"

The 13-Week Cash Flow Forecast

Professional finance people use complex models. You need something you'll actually use. The 13-week forecast is simple and practical:

1. Start with your bank balance today
2. For each of the next 13 weeks, list:
   • Money coming in (client payments you're expecting)
   • Money going out (supplier payments, wages, rent, etc.)
3. Calculate the running balance — does it go negative anywhere?

Update this weekly. It takes 30 minutes and will save you from nasty surprises.

What to Include in "Money Out"

Builders often forget these regular outgoings when forecasting:

• VAT payments — quarterly, and often bigger than expected
• Corporation tax / Self-assessment — due dates creep up
• CIS deductions — if you're a contractor paying subbies
• Insurance renewals — annual but painful
• Vehicle costs — MOT, tax, servicing
• Tool and equipment replacement
• Training and certifications — CSCS renewals, etc.

Buffer: The Cash You Don't Touch

Every construction business needs a buffer—money in the bank that's not allocated to anything. How much?

Minimum: 2 months of fixed costs (wages, rent, insurance, vehicle costs)

Comfortable: 3-4 months of fixed costs

Building this buffer should be a priority. Even £500/month into a separate "buffer account" adds up.

How to Handle Late Payments Without Losing Clients

Late payment is endemic in construction. Here's how to handle it professionally:

The Escalation Ladder

Prevention Is Better Than Chasing

The best late payment strategy is preventing it in the first place:

• Invoice immediately when a stage is complete. Same day if possible.
• Make payment easy — bank details on every invoice, offer card payments if you can.
• Confirm receipt — call or message to confirm they've received the invoice.
• Remind before due date — a friendly "just checking you have everything you need for payment" two days before.

When It's a Commercial Client

Larger clients and main contractors often have "standard" 60 or 90-day payment terms. Push back:

• Negotiate shorter terms for smaller contractors (many will agree to 30 days if asked)
• Ask about early payment discounts in reverse—offer 2% discount for payment within 14 days
• Check their payment run schedule and time your invoices accordingly
• Build the cost of delayed payment into your price

Tools and Systems That Help

Accounting Software

If you're still doing invoices in Word and tracking payments in your head, you're making life harder than it needs to be. Options for UK builders:

• Xero — popular, integrates with most things, good mobile app
• QuickBooks — solid option, good for CIS
• FreeAgent — simpler, good for sole traders

All of these will show you what's outstanding, automate payment reminders, and give you basic cash flow visibility.

Project Management Tools

Tracking project progress helps you invoice on time and spot problems early. When a stage is complete, you should know immediately—not realise two weeks later that you forgot to invoice.

Tools like BuildersAI help you track what's happening on site in real-time, so you always know when milestones are hit and can invoice the same day.

Invoice Financing

If you have reliable clients who just pay slowly, invoice financing can bridge the gap. You get 80-90% of the invoice value immediately; the financing company collects the full amount later.

It's not free (typically 1-3% of invoice value), but it can be cheaper than overdraft interest and less stressful than chasing payments.

UK options include Funding Circle, MarketFinance, and traditional banks.

Key Takeaways

Cash flow management isn't glamorous. Nobody becomes a builder because they love forecasting and chasing invoices. But getting it right means you can focus on what you're actually good at—building—without the constant stress of wondering whether you can make payroll.

Start with one thing: the Friday forecast habit. Everything else builds from there.