Building a stronger future: Tackling cash flow challenges in construction

The construction sector is poised for growth. With government pledges to boost infrastructure spending, accelerate housing developments, greenlight renewable energy projects and expand airport capacity, the UK’s built environment is set for a major expansion. But at the same time, contractors are grappling with the realities of global economic uncertainty. From volatile interest rates and high inflation to persistent supply chain disruptions and insolvencies, many firms are finding it harder than ever to balance their books.

For an industry that typically runs on tight margins and long payment cycles, cash flow becomes critical. With so many external pressures beyond their control, construction companies must ensure they have clear and accurate visibility of their financial position. To do so, businesses need to start by tackling one of the industry’s most persistent and problematic practices: retention.

A long-standing problem hiding in plain sight

Retention, where a percentage of payment (typically 5–10%) is held back until a project is completed, is a standard part of most construction contracts. In principle, it’s designed to give clients protection against unfinished or poor-quality work. But in practice, it causes serious cash flow problems for contractors.

According to research, 71% of construction firms have experienced delays in receiving retention payments and 44% have faced non-payment due to upstream insolvencies. Projects can be signed off months late, clients can use retention as leverage in disputes, and in the worst cases, the money may never arrive at all.

This puts significant pressure on available capital. Contractors are expected to fund materials, labour and subcontractors – often across multiple projects – without access to the full value of the work they’ve already delivered. It’s a serious strain on day-to-day operations, especially in a climate where the cost of borrowing is high and credit is harder to secure.

The government is trying to increase transparency in payment practices with new regulations that require companies to disclose retention-related information. The aim is to shed light on the scale and distribution of withheld funds so that policymakers and industry stakeholders can make accurate decisions about future reforms. However, many argue that reporting alone isn’t enough. Instead, enforceable penalties or stricter regulations to limit retentions are the only way to resolve the underlying issues and protect companies.

Traditional processes aren’t fit for purpose

To make matters worse, many firms still rely on outdated or manual invoicing. With no clear separation between regular and retained payments, it’s difficult to track what’s owed, when it’s due, or whether it’s even been released. Finance teams have to navigate complex spreadsheets, chase unpaid invoices and make forecasts based on inconsistent or inaccurate information.

This creates serious blind spots. Without clear visibility into retained funds, companies can’t plan properly. They may assume they have more cash available than they do and so fail to spot risks early, or miss opportunities to secure credit because their financial health looks weaker than it is in reality.

Smarter systems bring cash flow clarity

Forward-thinking construction firms are reassessing how they manage accounts receivable (AR) to help solve the issues surrounding retention. New technology and automation tools are making it possible to handle retention more efficiently, giving finance teams greater clarity and control over cash flow.

With automated systems in place, companies can track retention separately from standard invoicing. This helps AR teams clearly see when retained payments are due or overdue, and ensure late payments aren’t distorting their current cash flow picture. Instead of chasing every outstanding invoice, teams can focus their efforts where it matters, such as clients with invoices due now instead of later, as well as patterns of late payments

These tools can also feed directly into cash flow forecasts and financial planning. This gives businesses a more accurate view of their cashflow, helping them avoid unexpected shortfalls and make data-driven decisions about when and how to invest. Some tools even offer credit insights that help companies assess the risk of taking on new work based on a client’s previous payment behaviour

Retention doesn’t only impact internal processes, it can have a direct effect on client relationships. Chasing customers for payments too early or sending incorrect invoices can create tension. But by using automation to bring accuracy and transparency into the process, companies can demonstrate professionalism and fairness. In a sector where reputation often determines who gets the next contract, strong relationships are a valuable advantage

Strong foundations start with cash flo

Construction may be entering a growth phase, but the road ahead is far from smooth. In a high-risk, low-margin industry, financial resilience can be make or break. This resilience begins with understanding exactly where your money is, and when it’s coming in

Retention has long been an accepted part of doing business in construction. But it doesn’t have to be a black hole in cash flow. With smarter systems and automated invoicing tools, companies can finally bring retention under control. Businesses that take advantage of innovative technologies will reduce risk, improve planning and lay the financial foundations for long-term growth.

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