Practical tips for improving a contractor’s cash flow.
Introduction
In the UK construction industry, late payments are one of the most common causes of cash flow issues. With complex project cycles, reliance on timely certification, and high upfront costs, contractors face unique financial challenges. By blending procedural rigor with relationship-building and the legal safeguards provided by the Housing Grants, Construction & Regeneration Act (1996), construction businesses can manage cash flow effectively and reduce the impact of late payments.
These tips combine practical cash flow management, with strategies to address late payments.
1. Manage late payment risks proactively
o Step 1: Assess your payment risk tolerance
Start by deciding how much payment risk you’re willing to take. If your tolerance is low, prioritise upfront payments. While this limits your market, especially in B2B, it reduces the chance of cash flow disruptions. If you choose to offer terms, protect yourself with the following steps:
o Step 2: Vet your clients thoroughly
Before starting any project, perform credit checks on new clients to assess their payment reliability. Monitor creditworthiness throughout the relationship, as declining credit signals potential issues. While turning down a contract is difficult, it’s better than facing unpaid invoices and costly disputes.
o Step 3: Have a clear understanding of the contract being used
Using standard contracts can reduce payment disputes as people are familiar with them. They specify payment schedules, certification processes, and penalties for late payments. Having a QS or lawyer check non-standard clauses will safeguard you.
o Step 4: Build strong relationships
Good relationships with QS’s, project managers or contract administrators, and the accounts teams can make a difference. After submitting a certificate or invoice, communicate directly with key stakeholders and ask if there are issues with it being agreed or processed. Strong personal connections reduce the likelihood of delays.
o Step 5: Act promptly on late payments
If a payment is overdue:
· Contact the clients representative or the client immediately to understand the cause
· Document all communication professionally
· Reference the Housing Grants, Construction & Regeneration Act, which entitles you to adjudication for resolving disputes efficiently
2. Streamline certification and payment processes
The construction payment process adds an additional layer, with invoices only valid once work is certified. Follow these best practices to avoid delays:
Track progress valuations: Ensure work is inspected and signed off promptly by the project certifier
Submit complete documentation: Include all required details in your payment applications to prevent rejections or delays
Issue payment notices: In line with the Construction Act, these formal documents specify the payment due and deadlines, reducing disputes.
3. Enhance cash flow efficiency
Negotiate favourable payment terms - Where possible, secure milestone-based payments tied to project progress. These regular inflows reduce financial strain, especially on long projects.
Optimize supplier agreements - Negotiate supplier credit terms to delay outflows. Many suppliers offer trade accounts or flexible payment schedules that can help you hold onto cash longer.
Minimize operational waste - Efficient use of resources, time, and materials reduces costs. For example, planning logistics carefully avoids unnecessary downtime and stockholding expenses.
4. Leverage legal protections
Housing Grants, Construction & Regeneration Act (1996)
This Act enforces timely payments in the construction sector. Key provisions include:
Adjudication rights: Enables fast, cost-effective resolution of payment disputes
30-Day payment deadlines: Ensures payment notices are adhered to unless formally contested
Interest on late payments: Adds pressure on clients to settle overdue amounts
Debt recovery options
If payment issues persist:
Pursue legal recovery as a last resort, ensuring your T&Cs and payment notices are in order
5. Long-term strategies for financial stability
Monitor overheads regularly - Conduct regular audits of expenses like rent, utilities, and subscriptions. Cutting unnecessary costs improves liquidity.
Optimize tax reliefs - Take advantage of schemes like R&D tax credits, capital allowances, and sector-specific grants to increase cash reserves.
Explore financing options - Short-term financing (e.g., invoice factoring) or equity investment can provide working capital during growth phases. Align financing options with your project cash flow to avoid over-leveraging.
Strong cash flow management in construction requires a mix of procedural safeguards, legal awareness, and relationship-building. By proactively addressing payment risks and using tools like the Housing Grants, Construction & Regeneration Act, your business can mitigate late payments and ensure steady financial health.
If you’d like advice or help improving your cash collection processes, get in touch for a no-obligation discussion about contract records for claims, credit control and cash flow management. Peter.Searle@ba4cs.co.uk
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