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Insight · Commercial

The gap between doing the work
and having the money.

Wages go out weekly, materials at thirty days, and the money comes back at sixty. Retention, CIS and the reverse charge each take a slice on the way. Why a job that made a profit can still run a firm out of cash.

Published ·7 min read·Written by Unibuild

On a typical subcontract, retention and CIS between them hold back something close to fifteen per cent of the contract value, and the rest arrives sixty days or more after the work was done. Labour has already been paid weekly and materials at thirty days. That is the gap, and it is why a job can return a perfectly good margin and still leave a firm unable to make Friday.

Profit and cash are different questions

Profit is a judgment about a job once it is finished. Cash is whether the wages clear on Friday. In most industries the two track each other closely enough that nobody has to think about the distinction. In construction they diverge structurally, and the divergence is built into the way the industry pays.

Three mechanisms take a slice of every valuation, and a fourth stretches the timing. None of them is a loss. Retention comes back, CIS deductions come back, and the payment does eventually arrive. But a business does not run on money that is coming back. It runs on money that is in the account, and the difference between those two things is what sinks profitable firms.

Nobody in this chain is stealing from you. The money is all coming back. That is precisely why it is so easy not to plan for the fact that it is not here yet.

One job, worked through

Take a £100,000 subcontract, valued monthly, retention at 3%, CIS at 20%, and a labour to materials split of 60 to 40. Round numbers, and the order in which retention and CIS are applied depends on your contract, so treat this as the shape rather than as your own arithmetic.

You work through March and apply on the 31st for £20,000: £12,000 of labour, £8,000 of materials.

  • Retention at 3% of £20,000 takes £600. The payment due becomes £19,400.
  • CIS at 20% applies to the labour element, roughly £11,640 of that £19,400, taking £2,328.
  • Cash you actually receive: £17,072.

So £2,928 of a £20,000 application does not arrive. Now put the dates on it. Under the default statutory timetable that payment reaches you around 24 April, and plenty of subcontracts run longer than the default. Meanwhile the £12,000 of labour went out weekly through March and was gone by the 31st, and the merchant's £8,000 falls due on 30 April.

Line those up and the position for one month of one job is that £20,000 left the business before £17,072 came back, and the £12,000 of it that was wages was out of the door up to eight weeks before the money for it arrived.

Now run that across the whole contract. On £100,000 with £60,000 of labour, retention accrues to £3,000 and CIS deductions to about £11,640. That is £14,640, near enough fifteen per cent of the contract value, which is not available to you while you are delivering the job. On a firm turning over two million pounds a year on similar work, the same ratios describe roughly £290,000 that is earned, owed, entirely legitimate, and somewhere else.

The three slices, and when each comes back

They come back on completely different clocks, which is the part that makes this hard to hold in your head.

  1. CIS deductions come back fastest, and monthly, but only if somebody files them. A limited company recovers them by reporting deductions suffered on its Employer Payment Summary, which offsets them against the PAYE bill. Where that submission goes in without the figures, the money simply sits with HMRC for a year. That mechanism, and the four reasons it fails, is set out in reclaiming CIS deductions.
  2. Retention comes back in two halves, on dates that can be a year or more apart, and the second half is the one nobody chases. The four dates that govern it are in retention, and the money that goes missing.
  3. The payment itself arrives on a timetable set by statute rather than by goodwill, and whether it arrives in full depends on notices that both sides are supposed to serve. That is pay less notices, and the timetable behind them.

The cushion that went in 2021

There used to be a fourth item working in your favour, and a lot of firms were relying on it without ever having called it anything.

Before March 2021 a subcontractor added VAT to its invoices, collected it, and held it until the end of the quarter. On the application above that would have been roughly £3,900 arriving with the payment and not leaving for up to three months. Across a year of applications it functioned as a revolving interest-free facility, and it refilled itself.

The VAT domestic reverse charge removed it. The customer now accounts for the VAT and the supplier never touches the money. Nothing about what anyone owes changed. What changed is that a working capital buffer a lot of subcontractors had been quietly running on stopped existing, permanently, in the same period as everything else got tighter.

Why they compound

Each of these on its own is manageable. They arrive together, and they interact.

The firm most exposed is the one supplying mostly labour to main contractors, because the CIS deduction lands on the largest share of its invoice while it has the smallest PAYE bill to offset against. It is also, generally, the firm with the least room to negotiate retention terms, and the one paying its people weekly while being paid monthly in arrears plus terms. Every structural feature points the same way for the same business.

Add growth to that and it gets worse rather than better. A firm winning more work funds more labour up front and waits on more applications, so the faster it grows the further behind its cash falls. Overtrading is not an exotic failure mode in construction. It is the ordinary one, and it happens to firms whose order book looks excellent right up until it does not.

What actually closes the gap

In rough order of how much difference each one makes.

  • Gross payment status, where you qualify. It removes the 20% at source entirely and is the single largest change available to a labour-heavy subcontractor. It has tests to meet and a compliance record to keep, and it is worth the effort.
  • File the EPS with the deductions on it, every month. This is free, it is already somebody's job, and it converts an annual recovery into a monthly one.
  • Negotiate retention before you sign, not after. A cap, a shorter defects period, or a retention bond are all ordinary asks at the point of award and impossible ones afterwards.
  • Apply on time and completely. A late or unsupported application does not just delay this month, it moves the whole chain of statutory dates, and it hands the other side the easiest possible reason to pay less.
  • Know your position while the job runs, rather than after it. Almost every firm that gets caught by this was not reckless. It was working from a picture of its own position that was three weeks old.
  • Watch client concentration. Everything above assumes you get paid eventually. If most of your exposure sits with one main contractor, the gap stops being a timing problem and becomes an existential one.
Where this touches the platform

This is the problem Unibuild is actually pointed at. Applications sit against the project with their dates and receipts, retention withheld is captured against the receipt it came off so the cumulative figure held is arithmetic rather than archaeology, and gross applied and gross balance are calculated as at each row's own date rather than only as at today. Outstanding application value is bucketed into current, thirty, sixty, ninety and one hundred and twenty plus days, grouped by the manager responsible. On the subcontract side, the exposure report totals orders, invoices and payments across the ledger, so the money going out has the same visibility as the money coming in. What it does not do is file your tax, calculate CIS or replace your accounts package, and a firm that expects one system to do both is usually disappointed by whichever half was bolted on last.

Cost control Applications for payment Financial and invoicing For directors

Where to start, on Monday

Work out your own number rather than borrowing the one above. Take last year's turnover, split it into labour and materials, apply your actual retention percentage and your CIS rate, and you have the sum that is structurally unavailable to you at any given time. Directors are routinely surprised by it, and it is the figure that should be sitting next to the overdraft limit in any conversation about facilities.

Then answer three questions about this month specifically. Did the EPS carry the CIS figures. Which jobs passed the end of their defects period without anybody asking for the second half of retention. And what is the oldest application on the aged debt list. Those three take an hour between them and they are where the recoverable money is.

Asked most often

The follow-up questions.

Each slice has its own page: retention, CIS deductions and the reverse charge.

Why do profitable construction companies run out of cash?+
Because retention and CIS hold back around fifteen per cent of contract value while the work is being delivered, and the remainder arrives sixty days or more after the work was done, by which time labour has been paid weekly and materials at thirty days. None of it is a loss and all of it comes back, but a business runs on cash in the account rather than money that is owed to it.
How much of a construction contract is held back?+
On a £100,000 subcontract with 3% retention, 20% CIS and a 60/40 labour to materials split, retention accrues to £3,000 and CIS deductions to about £11,640. That is £14,640, close to fifteen per cent of the contract value, unavailable while the job runs. The exact figures depend on your contract and the order in which retention and CIS are applied.
Why did the VAT reverse charge make cash flow worse?+
Before March 2021 a subcontractor collected VAT on its invoices and held it until the quarterly return, which worked as a revolving interest-free facility. Under the reverse charge the customer accounts for the VAT and the supplier never receives it. Nothing changed about what anyone owes, but a working capital buffer many subcontractors relied on stopped existing.
Which construction firms are most exposed to the cash gap?+
Labour-heavy subcontractors supplying main contractors. The CIS deduction lands on the largest share of the invoice while the firm has the smallest PAYE bill to offset it against, it usually has least room to negotiate retention, and it pays its people weekly while being paid monthly in arrears plus terms. Growth makes it worse, because more work means funding more labour up front.
What is the fastest way to improve construction cash flow?+
For a labour-heavy subcontractor, gross payment status makes the largest single difference, because it removes the 20% deduction at source entirely. After that, filing the Employer Payment Summary with CIS deductions suffered on it converts an annual recovery into a monthly one and costs nothing, and negotiating retention terms before signing rather than after.
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