Cash Flow Forecasting for Construction Companies in the UK: A Practical Guide

Construction is one of those industries where a firm can be showing profit on paper but be short of cash. Raw materials and labour costs can be required to be borne weeks in advance of the certification of payment applications. Moreover, even once the payments have been certified, there can be another 30 to 60 days before the money actually lands in your account. Retention provisions can take some portion of your payments even further away from your hands. For UK contractors managing multiple construction projects, such a gap between making money and getting paid can put them under serious stress on working capital.

The cash flow forecast is nothing but a projection for the coming 13 weeks of cash inflows and outflows in the company’s operation. It does not replace your profit and loss account. Rather, it tells whether or not you would be able to generate enough cash to cover your obligations when due, in spite of your profitable project.

Why Construction Cash Flow Is Different From Other Sectors

Generic cash flow models tend to operate under the assumption that the organisation will generate an invoice and receive payments within a few weeks’ time. Construction involves a somewhat more complicated procedure of receiving payments. There are several characteristics that make cash flow in the construction industry especially challenging:

• Payment is dependent upon the presentation of a valuation or payment application and assessment and certification by the contractor or client, depending on the specific type of contract.
• Retention amounts can be taken out of construction payments and released when contractual conditions are fulfilled. The amount and release dates vary with each specific contract instead of having one set standard for the entire industry.
• When your organisation works as a subcontractor and participates in the Construction Industry Scheme, 20% is generally withheld from subcontractors’ payments. In cases when the higher rate applies, a 30% withholding is applicable. This does not apply to subcontractors whose status is that of a gross payment subcontractor.
• Various fixed costs like VAT, Corporation Tax, PAYE and CIS liabilities have specific payment dates regardless of when your clients pay you.

Put these factors together across two or three live contracts, and it becomes much easier to lose sight of how much cash is actually available compared with amounts that are still owed to the business.

The Case for a Rolling Weekly Forecast

Although monthly forecasting can be helpful in making long-term forecasts, it can not give the level of detail required for a construction company that deals with weekly payment applications and subcontractor payments.

The use of a rolling 13-week forecast enables you to see the cash flow every week. You get a better idea about the amount of cash that can be received and paid out during any particular week. By regularly updating the forecast, you can replace the earlier projections with real numbers.

What makes this forecast valuable is the added lead time. By knowing about a potential cash shortfall weeks before its occurrence, you have more time to explore possible solutions such as seeking suitable financing, talking about payment schedules with clients or postponing unnecessary expenses. Such solutions become difficult to manage when your account is already under pressure.

Building the Forecast Step by Step

An accurate forecast involves following a process and not just coming up with an estimate.

1. Detail every single live contract together with its value, payment period agreed and to date certified sum with the relevant retention.
2. Identify the dates upon which the relevant retention can be released according to the terms of the contract and not assuming that all the projects follow the same release schedule.
3. Project every single cash flow on a weekly basis, including wages, PAYE, subcontractors with relevant CIS deduction, material suppliers, plant hire, VAT, Corporation Tax, and any other commitments.
4. Be very careful with CIS deductions. While the gross figure due may be the one shown, it does not always mean that the net amount received is what gets to the bank account. In the forecast, ensure that the net amount receivable is captured and the dates upon which the deduction can be claimed.
5. Prepare various forecasts, say base case and downside case, using assumptions that are relevant to the risks being faced by the business. The risks can be late receipts from customers, increased cost of materials or increased cost of the project itself.
6. Mark out any week on the downside scenario on which there is a negative closing balance. This gives an appropriate opportunity to prepare for it in advance.

What a Construction Cash Flow Template Should Contain

Construction-specific cash flow forecasts require more detail than the standard small business cash flow forecast.

The inflows need to include:

• Certified receipts for payments, which include the exact amount expected to be paid to the business’s account after any applicable CIS deductions
• Retention releases for certain dates within the contract
• VAT or CIS repayment amounts to expect from HMRC

The outflows need to include:

Weekly wages and PAYE

• Payments to subcontractors after any applicable CIS deductions
• Payments to material suppliers according to their terms of credit
• Plant hiring costs
• VAT and Corporation Tax payment dates

Always end your construction-specific cash flow forecast with a weekly net movement figure and a total closing balance. The total closing balance must always end up being positive. Otherwise, you need to work out how the difference will be financed.

The Accounting and Tax Side That Gets Overlooked

Cash flow projections for any construction firm are inextricably linked with how their bookkeeping and tax affairs are handled. Even minor variations in invoicing, accountancy and payment can cause rapid problems with cash flow.

There are a number of key areas.

CIS Deductions

The fact that CIS deductions are not losses in themselves means that the method by which the CIS deductions suffered are claimed depends on the business type. When it comes to a subcontractor that operates as a limited company, any CIS deductions suffered are usually offset against qualifying employers’ liabilities, which include PAYE, National Insurance contributions and CIS deductions payable to HMRC. The remainder can be reclaimed once certain conditions at the year-end have been satisfied, and an overpayment may even be claimed to offset Corporation Tax.

VAT and the domestic reverse charge

VAT can also be an area where construction cash flow can be impacted, especially where the domestic reverse charge comes into play. In situations where the domestic reverse charge applies, the customer pays VAT instead of the supplier if the conditions are satisfied. This means that the supplier can not get the VAT component into its bank account when such transactions occur. The forecast needs to be able to identify supplies subject to the domestic reverse charge and those subject to the normal VAT accounting system.

FRS 102 changes

The majority of small to medium-sized enterprises in the UK which maintain accounts under the FRS 102 are required to consider the latest amendments in their accounts. These amendments have been introduced by the Periodic Review, which came in 2024, and some of the key amendments include changes to revenue recognition and lease accounting. All these amendments have been effective for accounting periods starting from 1 January 2026 and forward. The new revenue recognition requirement is based on the contract with the customer.

Changes have been made to the accounting for leases in the FRS 102 amendments. A right-of-use asset and corresponding lease liability will need to be recorded by lessees for most leases, where appropriate exemptions and requirements apply as per the standard. Changes will be made to the accounting on the balance sheet and reported expenses, but it may not impact the timing of the payment of cash flows.

Making Tax Digital for Income Tax

From 6 April 2026, Making Tax Digital for Income Tax has been applied to sole proprietors and landlords who have qualifying income that exceeds £50,000 in the 2024/25 tax year. It will reduce to £30,000 from 6 April 2027 and then to £20,000 from 6 April 2028, depending on the relevant past tax years. The partners will eventually become part of MTD for Income Tax, but this is yet to be defined by HMRC.

This means that construction sole proprietors that fall under MTD for Income Tax are required to maintain digital accounting records and submit quarterly updates. Quarterly updates under MTD for Income Tax can not be quarterly tax payments. Instead, they should continue to include the actual tax payment dates and amounts alongside the business’s other expected cash outflows.

Choosing the Right Software

Software selection determines the level of ease with which cash flow forecasts can be integrated with the bank feeds, accounting systems and data from suppliers.

• Both Xero and QuickBooks offer cash flow tools along with CIS functionalities to assist construction companies in keeping their finances organised and tracking cash flows.
• Sage 50 could potentially be used for CIS compliance and reporting, while companies could use an independent spreadsheet or tool for cash flow forecasting.
• Spreadsheets are very flexible, especially for construction companies which want to base their cash flow forecasts on individual projects. However, they need regular updates to stay relevant and useful.

Software should complement the process of forecasting, not substitute it. The value of forecasting is only as long as payment schedules, projects and cash commitments stay up to date.

How Reflex Accounting Can Help

Cash flow forecasting can only be valuable if it takes into account the real payment patterns, risks and commitments of the construction business. This is how we assist UK construction businesses in meeting this need.

• We prepare tailor-made 13-week cash flow forecasts based on your ongoing projects, payment patterns and retention periods and not just based on a standard monthly forecast model.
• We separately track your retention for each project and follow the expected release dates in order to distinguish them from your actual cash position.
• We make proper CIS deductions on both sides such that your net receipts are accounted for, and the deductions suffered are recognised as per the requirement.
• We advise on VAT and domestic reverse charge treatment such that your cash flow forecast takes into account the real cash flows rather than just the face value of invoices.
• We assist you in keeping your accounts up to date in compliance with the latest FRS 102 standards starting from 2026.
• Support for eligible sole proprietors with MTD for Income Tax requirements is provided in order to maintain consistency between cash flow and digital accounting.
• We do regular forecasts versus actual analysis and adjust our forecasts as and when there are changes to contract terms, dates of payments, or cost factors affecting our cash forecasts.
• We produce forecasts that may be used for applications for finance as well as situations where a view of the projected cash flows is needed.

Frequently Asked Questions