Construction cash flow projection: a worked example for builders and contractors

Short answer: a construction cash flow projection shows, month by month, when the money for a job will actually reach the bank and when its wages, subcontractors and materials will leave it. For a builder those dates are far apart. You pay for the work first, you are paid for it a month or more after each valuation, and part of every payment is held back as retention until the job is finished and the defects period ends. So a job with a healthy margin can still take the business overdrawn while it is being built. In the worked example below, a £240,000 contract that makes £48,000 of gross profit leaves the company £5,640 overdrawn in its second month, and £67,080 overdrawn if the client pays in 60 days instead of 30.

What goes into a construction cash flow projection

Line	What to put in	When it hits the bank
Value of work done	Your planned valuation or progress claim for each month, from the programme	Not yet: this is what you will invoice
Money received	Each valuation less retention	After the payment terms in the contract, often 14 to 30 days, sometimes longer
Retention released	Usually half at practical completion and half after the defects period	Months, often a year, after the work
Wages	Your own site team, with employer taxes and pension or super	The month the work is done
Subcontractors and materials	The cost of each month’s work you buy in	When their invoices fall due, often the month after
Overheads	Office, vans, insurance, plant finance, directors	Every month, whether a job is running or not
Tax	VAT or GST, payroll tax, CIS in the UK, corporation or company tax	On their own dates, often in a lump

The cumulative line, the running total of the job’s cash, is the one to watch. Its lowest point is how much money the job needs from the business before it starts paying back.

A worked example: a building contractor in Manchester

These figures are made up. Claire’s building company is a small limited company that has won a £240,000 contract for a two-storey extension and refit, built from March to June 2027. To keep the example short, VAT and CIS are left out (see the mistakes section below), and Claire’s smaller jobs bring in about enough to cover her £9,000 a month of overheads, so the bank moves by this job’s cash. The company has £12,000 in the bank on 1 March.

The terms. The work is valued at the end of each month and the client pays 30 days later. The contract holds back 5% retention from every payment: half is released after practical completion, the other half after a 12-month defects period. Costs are 80% of the value of the work. Of that, 40% is Claire’s own site team, paid in the month, and 60% is subcontractors and materials, paid the month after.

Step 1: the job on the Profit and Loss. Work starts slowly, peaks in May and tails off.

Month	Value of work done	Costs	Gross profit
March	36,000	28,800	7,200
April	72,000	57,600	14,400
May	84,000	67,200	16,800
June	48,000	38,400	9,600
Total	240,000	192,000	48,000 (20%)

The job makes money from its first month. The Profit and Loss never shows a bad month.

Step 2: the same job in cash. Each valuation is paid a month later, less 5%.

Month	Received (after 5% retention)	Wages paid	Subcontractors and materials paid	Job cash	Bank at month end
March	0	(11,520)	0	(11,520)	480
April	34,200	(23,040)	(17,280)	(6,120)	(5,640)
May	68,400	(26,880)	(34,560)	6,960	1,320
June	79,800	(15,360)	(40,320)	24,120	25,440
July	45,600	0	(23,040)	22,560	48,000
August	6,000 (half the retention)	0	0	6,000	54,000
July 2028	6,000 (the rest)	0	0	6,000

Brackets are money going out, or an overdrawn bank.

What the projection tells Claire

1. The job needs £17,640 before it pays back. The job’s cash is 11,520 out in March and 6,120 more in April, so it peaks at £17,640 at the end of April. With £12,000 in the bank, the account is £5,640 overdrawn that month, on a job that is £21,600 in profit by then.
2. Cash catches up with profit two months after the work ends. By the end of June the Profit and Loss shows the whole £48,000; the bank has gained £13,440 from the job. It reaches £42,000 in August.
3. Retention is a quarter of the profit. £12,000 is held back in total, and £6,000 of it arrives about a year after the last day on site. Across several jobs, retentions add up to a real balance of money you are owed, and it is easy to forget to claim.

A what-if: the client pays in 60 days

The client’s quantity surveyor asks to move to 60-day payment. The costs stay the same; each payment simply arrives a month later.

Month	Received	Job cash	Bank at month end
March	0	(11,520)	480
April	0	(40,320)	(39,840)
May	34,200	(27,240)	(67,080)
June	68,400	12,720	(54,360)
July	79,800	56,760	2,400
August	45,600 + 6,000 retention	51,600	54,000

Same job, same profit, same bank balance by August, but the company now needs to borrow about £67,000 at the end of May instead of about £6,000 at the end of April. That is the number to take to the bank before signing, or the reason to say no to the terms. Payment terms change a builder’s cash far more than a point or two of margin does.

How to improve the projection before the job starts

• Agree the payment terms first. Shorter terms, or valuations every two weeks on a big job, cut the low point the most.
• Ask for an advance or deposit for the materials you buy up front, or include materials delivered to site in the first valuation if the contract allows it.
• Match your suppliers to your client. If the client pays in 30 days and your subcontractors are paid in 30 days, most of the cost is funded by the client. Paying your own team weekly cannot move, so that part is always yours to fund.
• Lower or replace the retention. Some clients accept a lower percentage or a retention bond instead of cash held back.
• Diary every retention release. List each job with retention held, the practical completion date and the end of the defects period, and invoice on the day each one falls due.
• Arrange an overdraft or facility while the projection is still a projection. A lender agrees more readily when you show the low point and the date it recovers.

How to build one from Xero

1. Start from the bank. Use the reconciled bank balance in Xero today (why Xero’s balance can differ from the bank).
2. Add what is already owed to you. Accounting › Reports › Aged Receivables lists each client’s unpaid valuations and when they fall due (how to read it).
3. Add what you already owe. Aged Payables lists subcontractor and supplier bills by due date.
4. Add each live and planned job month by month from its programme: value of work, payment terms, retention, and the cost split between your own team and bought-in work. A spreadsheet is fine; the cash flow forecast tool builds the month-by-month bank line from figures you type in.
5. Add overheads and tax dates, then check the lowest point of the bank line.

Xero has no built-in retention feature. A common way to record it is a current asset account called Retentions receivable: invoice the full valuation with a negative line for the retention coded to that account, then raise a new invoice coded to the same account when the retention is released. The balance of that account on the Balance Sheet is then the total retention you are owed. Ask your accountant which tax rate to use on the retention lines, because VAT or GST on retentions and the UK’s domestic reverse charge for construction have their own rules.

For profit per job, tag income and costs with a tracking category per job or use Xero Projects, which is not on every plan (how to see profit by job in Xero). For a week-by-week view of the next quarter across all jobs, use a 13-week cash flow forecast.

Common mistakes

• Projecting cash from the programme value. Valuations are invoices, not cash. Move each one to the month the client will actually pay, less retention.
• Leaving out retention, or forgetting to claim it. It is part of your profit that arrives months later, and it only arrives if you invoice it.
• Leaving out CIS. In the UK, if you are a subcontractor under the Construction Industry Scheme, the contractor deducts tax from the labour part of each payment (usually 20% if you are registered). A limited company can set those deductions against its own payroll taxes, so the cash comes back, but later.
• Forgetting VAT or GST timing. If you collect VAT or GST, it is in the money received and goes out with the return. Under the UK domestic reverse charge, many building services between VAT-registered businesses are invoiced without VAT, so it is not in the cash at all.
• Projecting one job on its own. Overlapping jobs stack their low points. A second job like this one starting in April would need its own £17,640 at the same time.
• Not updating it. Replace each month’s plan with the actual valuation, payment date and costs, and roll the projection forward.

Common questions

What is a construction cash flow projection? It is a month-by-month forecast of the money a building job or business will receive and pay out, based on the programme of work, the valuation and payment dates in the contract, retention, and when wages, subcontractors and materials are paid. Its lowest point shows how much cash the job needs before it pays back.

Why do profitable building jobs run out of cash? Because the costs are paid before the client pays. Wages go out as the work is done, subcontractors and materials soon after, while each valuation is paid weeks later and part of it is held back as retention. In the example, a job with a 20% margin needs £17,640 of the company’s own cash in its second month.

How does retention affect cash flow? Retention, often around 5% of each payment, is money you have earned but will not receive until practical completion and the end of the defects period, often a year later. It counts as income on the Profit and Loss when you invoice the work, so profit looks higher than the cash you have.

How do I record retention in Xero? Xero has no built-in retention feature. A common approach is a current asset account called Retentions receivable: invoice the full valuation with a negative retention line coded to that account, then invoice the retention to the same account when it is released. Ask your accountant about the tax rate on those lines.

What is an S-curve in construction cash flow? It is the shape the cumulative value or cost of a job usually makes over time: slow at the start, fastest in the middle and slow again at the end. The example follows it, with 15%, 30%, 35% and 20% of the work in the four months.

How far ahead should a builder project cash? At least to the end of every job you have signed, plus the retention release dates, and in more detail week by week for the next 13 weeks. Update it every month as valuations are paid.

Your cash, checked every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: the cash in the bank against the end of last month, sales and profit against last month and the same month last year, money owed to you that is past due and by whom, and bills due in the next two weeks against your cash. It does not build projections, but it tells you each week whether the bank is following yours. It asks Xero for read-only access, and there is a 14-day free trial with no card.