Effective financial management in construction can keep your projects on track, reduce stress and boost long-term profitability. The sector has a long history of late payments, tight margins and unpredictable costs, and the ongoing economic climate has made careful planning more important than ever. According to the Office for National Statistics, the construction industry contributed over £110bn to the UK economy recently, yet many firms still struggle with day-to-day finances.
We at Smith Butler work closely with small and medium-sized enterprises (SMEs), and we know how important it is to find the right balance between daily cashflow needs and future project goals. Below, we share some guidance on managing project budgets, complying with HMRC rules and staying ready for unexpected costs.
Introduction to common financial challenges
Construction projects often involve multiple subcontractors, suppliers and changing work requirements. Delays or scope changes can lead to cost overruns and the result is a constant need for updated budgets. If your business is a limited company in 2024/25, you may be looking at a main rate of corporation tax of up to 25% on profits above £250,000. Meanwhile, VAT obligations have not fundamentally shifted and remain at a standard 20% for those trading over the £90,000 threshold. These responsibilities, combined with the Construction Industry Scheme (CIS) for subcontractors, mean that contractors need a clear plan for payment scheduling and record-keeping.
Project budgeting and unpredictable costs
A well-structured budget helps you handle materials, labour, plant hire and subcontractor expenses without running short of funds midway through a project. But no matter how precise your estimates are, unexpected costs can arise. Price fluctuations in materials or supply chain interruptions may mean you need extra contingency funds.
- Create a detailed project scope: Estimate labour hours and materials required for each phase. This helps you track spending on individual tasks.
- Allocate a contingency: Add a buffer (commonly between 5% and 10%) for unplanned spending. This way, a sudden hike in steel prices or a rush job for extra fixtures will not derail your entire budget.
- Review your profit margin: Construction margins are often tight. By monitoring each project’s profit margin regularly, you can identify early warning signs of cost overruns or inefficient workflows.
CIS and VAT responsibilities
CIS basics
Under the CIS, contractors deduct money from subcontractors’ payments and pass it to HMRC. The standard deduction rate is 20% for registered subcontractors, while those not registered may be deducted at 30%. It’s important to keep thorough records and file CIS returns accurately, as delays or mistakes could lead to penalties. Further guidance is available on the government website.
VAT considerations
The Domestic Reverse Charge (DRC) for VAT, introduced in March 2021, still applies to certain construction services. Under this system, VAT-registered customers are responsible for accounting for VAT, rather than the supplier. This helps prevent VAT fraud but also changes how invoices are raised and how VAT is reported.
If you’re planning construction projects in 2024/25, make sure you understand how the DRC affects your invoicing and cashflow to avoid misreporting. For company registration and updates, ask us or visit Companies House.
Cashflow management and supplier payments
Cashflow remains a persistent issue in construction. Late payments from clients can trickle down to late settlements with suppliers, which damages trust and can increase costs if suppliers charge interest or impose stricter terms. Here are steps that may help.
- Negotiate clear payment schedules: Set regular instalments based on project milestones or pre-agreed timelines. This helps you plan outflow and ensure you are not left waiting for large sums at the end of a project.
- Use digital tools: Cloud accounting software can automate invoicing and track when each payment is due. This reduces admin time and provides real-time insight into cash positions.
- Monitor supplier terms: Where possible, develop solid relationships with your suppliers so you can negotiate better payment terms. This might involve discounts for early settlement or extended terms that give you breathing space.
- Consider short-term finance: In some instances, bridging loans or invoice factoring can help you meet urgent costs if you are waiting on client invoices. However, always compare rates and be aware of repayment terms before taking on additional debt.
Working with an accounting partner
Running a construction project often leaves limited time to review every invoice, receipt and tax rule. By teaming up with us at Smith Butler, you can access specialised support tailored to the construction sector.
- Compliance made easier: We stay up to date with changes from HMRC, so you can rest assured your CIS submissions, VAT returns and payroll details are filed correctly.
- Budget reviews: Our team has experience across different types of construction and contracting setups. We can suggest better costing methods and highlight areas where projects might overspend.
- Focus on core work: Rather than spending hours chasing payments and keeping records, you can use that time to manage project quality and client relationships.
Read more about how we can support you on our website.
Building financial resilience
Economic uncertainties, material shortages or changes in legislation can all put pressure on your finances. When your strategies for handling cashflow and taxes are well organised, you have more time and resources to focus on growth.
- Reserves: Keep an eye on building a reserve fund that covers at least two to three months of operating expenses.
- Insurance coverage: Adequate professional indemnity, public liability and employer’s liability insurance can protect you from hefty legal fees and compensation claims.
- Regular reviews: Quarterly or monthly finance reviews help you spot trends, such as recurring late payments or rising supplier costs, and act before they escalate.
When your procedures and records are in good order, you can approach new business opportunities with added confidence. We have seen many construction businesses thrive once they have a consistent approach to invoicing, project budgeting and regulatory compliance. If you would like a personalised plan, our team is here to help.
Wrapping up financial management in construction
By planning budgets carefully, handling CIS and VAT correctly, and staying on top of supplier payments, your business will be in a stronger financial position. Cashflow concerns are not uncommon in this sector, but there are steps you can take to reduce risk. Whether you need a better method of tracking project costs or a clear strategy for meeting your tax requirements, we are ready to assist.
If you would like support with financial management in construction, get in touch to learn how we can make your accounting and tax obligations more manageable. Let us help you put a solid financial plan in place so you can focus on delivering high-quality projects.