By Hammond & Co
Introduction
Cash flow is the number one reason construction firms fail — not lack of work, not lack of clients, and not even lack of profit. Many construction businesses collapse despite being busy and profitable on paper. The projects are there, the demand is strong, the profit has technically been earned — but the cash is tied up in retentions, staged payments, and slow-paying clients.
This is the reality of the construction industry: you can complete the job, issue the invoice, and still wait months to receive payment. Meanwhile, subcontractors expect wages, suppliers want paying, and HMRC deadlines continue regardless of when the client decides to transfer the funds.
That’s why cash flow management is not simply “good financial practice” — it is the heartbeat of a construction business. Without foresight, planning, and proper systems, even experienced contractors can find themselves short of liquidity and relying on personal funds, loans, or expensive finance to keep operations running.
At Hammond & Co, we understand the pressures construction directors face. You’re running sites, managing labour, sourcing materials, quoting new work, dealing with clients — all while trying to stay in control of the numbers.
This article breaks down why cash flow is so challenging for construction firms, the common pitfalls we see, and how partnering with a specialist accountant can transform your financial stability — giving you clarity, confidence, and long-term control.
Why Construction Cash Flow Is So Complicated
Unlike most industries, construction does not operate on simple “do the work, get paid” terms. Instead, several unique factors make cash flow unpredictable and difficult to manage:
Retention Payments
Clients often hold back 5–10% of the contract value for months. You’ve earned it, you’ve taxed it — but you don’t have it.
Staged and Delayed Payments
Payments depend on valuation meetings, certificates, or QS approval. A single delay means weeks without expected cash.
Upfront Costs
Materials, plant hire, scaffolding, labour, site setup — construction demands cash before revenue arrives.
Fluctuating Labour Requirements
Workforces expand and contract as projects progress. Labour costs rise long before stage payments land.
CIS Deductions
Working under a main contractor often means receiving payments minus CIS deductions — shrinking your available cash further.
Seasonal Factors
Bad weather, supply delays, and winter slowdowns reduce income but not overheads.
Without strong forecasting and live visibility, these challenges combine into a perfect storm.
Common Cash Flow Mistakes Construction Firms Make
Even established companies fall into these traps:
1. Using invoices as a measure of performance
“Invoiced” isn’t the same as “paid.” Decisions based on expected income often lead to shortfalls.
2. No forward cash flow forecasting
Many businesses only look backwards at year-end accounts instead of forward at the next 6–12 months.
3. Using VAT or corporation tax money as working cash
This is one of the fastest routes to HMRC trouble — and last-minute panic.
4. Weak debtor control
Payments are chased reactively, not proactively or systematically.
5. CIS not reconciled monthly
This distorts what’s owed, what’s reclaimable, and how much cash is actually available.
6. No project-by-project visibility
Directors know how the site is progressing — but not always how the finances are performing.
When these issues combine, a profitable business can feel permanently short of cash.
The Domino Effect of Poor Cash Flow
When cash flow isn’t managed properly, the impact is immediate and damaging:
- Late wages and subcontractor payments → trust breaks down
- Suppliers cut credit → materials become harder to secure
- Directors use personal funds → stress and financial risk increases
- Growth opportunities are missed → no cash to take on bigger projects
- Tax bills become crises → VAT quarters and year-end become panic moments
- HMRC penalties escalate → hitting cash even harder
Cash flow issues don’t stay on the spreadsheet — they show up on site, in decisions, and in your stress levels.
How a Specialist Accountant Fixes the Problem
A general accountant looks at historic numbers.
A construction specialist accountant looks ahead and plans around cash.
Here’s how Hammond & Co address the unique cash flow challenges of construction businesses:
Problem |
Hammond & Co Solution |
Irregular income |
Detailed forecasting & staged payment planning |
Retentions |
Dedicated tracking & recovery strategy |
CIS deductions |
Monthly CIS reconciliation & reclaiming |
Tax bill shock |
Month-9 tax forecasting & ringfencing |
Poor visibility |
Real-time dashboards & reporting |
Late payers |
Structured debtor control processes |
We don’t just do compliance.
We build visibility, resilience, and stability into your business.
Technology That Puts You in Control
Modern accounting software is transformational for construction firms — when used properly.
We implement tools such as:
- Xero – real-time cash, debtor, and creditor visibility
- Dext / Hubdoc – capture receipts instantly from site
- BrightPay – integrated payroll + CIS
- Live bank feeds – immediate financial updates
- Automated debtor reminders – chasing payments without awkward conversations
This creates a system where:
- Paperwork stays current
- Your accountant sees live numbers
- Forecasting becomes accurate
- Cash decisions are based on today, not last quarter
Case Study: The Turnaround
A fictional example (GDPR-safe):
“Oakridge Developments Ltd” approached Hammond & Co with:
- Retentions never tracked or recovered
- Unpredictable subcontractor payments
- VAT funds used to cover site costs
- CIS unreconciled — overpaid tax
- Tax bills always a surprise
What we implemented:
- Xero + Dext for live bookkeeping
- Monthly CIS reconciliations
- A rolling 12-month cash flow forecast
- Dedicated retention tracking
- Structured debtor chasing
- Month-9 tax forecasting
The outcome:
- £13k CIS reclaimed
- £30k in retentions identified
- Tax ringfenced months in advance
- Suppliers paid reliably
- Director stopped injecting personal funds
The profit didn’t change — the visibility did.
And with visibility comes control.
How Hammond & Co Work With Construction Firms
Our onboarding is designed to stabilise and improve cash flow from day one:
Phase 1 — Stabilise
- Clean up bookkeeping
- Fix CIS & payroll
- Bring software and records up to date
Phase 2 — Visibility
- Introduce live dashboards
- Forecast cash, VAT & corporation tax
- Track retentions and debtor ageing
Phase 3 — Strategy
- Month-9 tax planning
- Growth planning
- Director remuneration & profit extraction strategy
This isn’t just accounting.
It’s long-term financial partnership.
Construction Cash Flow Checklist
Every construction firm should be doing the following:
- Track retentions separately
- Forecast tax before year-end
- Reconcile CIS monthly
- Keep bookkeeping real-time
- Review client payment terms regularly
- Use cloud software (not spreadsheets)
- Know project profitability before completion
- Ringfence VAT
- Build a cash reserve
- Automate admin wherever possible
Small improvements create major stability.
Conclusion & Call to Action
In construction, cash flow isn’t just a financial issue — it’s a survival issue. You can be fully booked and profitable yet still struggle if visibility is poor and planning is reactive.
The right accountant doesn’t just produce accounts.
They prevent crises.
At Hammond & Co, we specialise in giving construction firms clarity, structure, and long-term control of their finances — with real-time data, forecasting, and industry-specific support.
If you’re ready to stop firefighting cash and start managing it with confidence, the solution is simple:
Work with a construction-focused accountant — not just any accountant.
Hammond & Co is here to help.