Winning a contract far larger than anything you have done before can drain the cash out of a perfectly profitable business inside three months. This is overtrading: costs start on day one, the money arrives long afterwards, and part of it is held back as retention for a year after that. On a £2m contract in a £5m business, the working capital gap is bigger than anything a business that size has funded before. Work out how deep it goes, and whether you could fund it if the client pays 30 days late, before you sign.
Key takeaways
- Growth is the biggest consumer of cash in most businesses; a contract worth 40% of your turnover increases what you are lending your customer by roughly the same proportion.
- Construction recorded 3,805 company insolvencies in the twelve months to June 2026, more than any other sector; most of those businesses had work and ran out of cash to deliver it.
- The danger is timing, not profitability: model the deepest point of the cash gap, stress it for a client paying 30 days late, and compare it with the cash and facilities you actually have.
You have just won the biggest contract in the company’s history. Two million pounds, on a business that turns over five. The team is delighted. The order book has never looked better.
Six weeks later you are sitting in front of your bank manager explaining why you need to extend the overdraft.
This is not a story about a badly run business. It is a story about a well run business that took on more work than its balance sheet could carry. That is a different problem, and a far more common one.
Why growth consumes cash: bigger is not the same as stronger
Turnover growth is widely treated as the main indicator of a healthy business. It is not. Every extra pound of turnover needs materials bought, wages paid, plant hired and overheads covered long before the customer pays you. That is what overtrading means in practice: trading beyond the working capital available to support the work, rather than trading badly.
A £2m contract on a £5m business is not a 40% increase in success. It is a 40% increase in the cash you are lending to somebody else.
Where the cash gap comes from: costs on day one, payment 60 to 90 days later
The problem is timing, not profitability.
Money going out
- When it starts: day one, and it is not negotiable.
- What it covers: materials on order, plant on hire, sub-contractors on site, payroll every week.
- Typical timing: immediate and continuous.
- Held back: nothing. Nobody on that list will wait until you get paid.
Money coming in
- When it starts: only after an application for payment is submitted, assessed and certified.
- What it covers: the certified value of work completed, less retention.
- Typical timing: commonly 60 to 90 days from doing the work to seeing the money, even when nothing is in dispute.
- Held back: retentions held until practical completion and beyond, so a slice of your margin can sit with the client for a year or more.
On a contract worth 40% of your turnover, that gap is larger than most businesses of that size have ever funded.
This is why the profit and loss account says the job is fine while the bank balance says it is not. Both are right. The profit is real; it just has not arrived yet.
Why do profitable construction companies fail? The 2026 insolvency data
In the twelve months to June 2026 there were 3,805 construction company insolvencies, around 17% of all cases where the industry was recorded and more than any other sector. Very few failed for lack of work. Most could not fund the work they had already won.
The payment data is better than the industry’s reputation suggests and still not good enough if your buffer is thin. Large contractors reporting under the payment practices regulations now average roughly 25 to 35 days. If you need paying in 30 days to cover next month’s payroll, you have no room for the one valuation that goes wrong.
Will the Small Business Protections Bill fix late payment and retentions?
Not yet, and not in time for the contract in front of you. The Bill, introduced in the House of Lords in May 2026, would cap payment terms at 60 days for large firms paying smaller suppliers, make late payment interest mandatory at 8% above the Bank of England base rate, and ban retentions in construction contracts. On the current base rate of 3.75%, that interest is close to 12%.
Do not build your cashflow plan on it. The Bill is still going through Parliament, the government will consult separately on how a retentions ban would work, and no implementation date has been set. Contracts you sign this year will be paid under today’s rules.
Three cashflow questions to answer before you sign the contract
None of this means turning down growth. It means answering three questions before you commit, not after you start on site.
1. How deep does the cash gap go?
Work out the maximum cumulative amount you will be out of pocket between starting work and your first certified payment. Not the average across the job. The worst single point. Model it at day 30, day 60 and day 90.
2. What happens if the client pays 30 days late?
Take that model, assume the client pays 30 days later than the contract says, and that retentions are held for the full period. Businesses do not fail on their base case; they fail on the version where one thing slips. If your cash and unused facilities do not cover the stressed number, you do not have the working capital for this job.
3. What does the contract cost you permanently?
Larger contracts usually need more supervision, more insurance cover and sometimes better systems. Those costs arrive early and stay long after the contract has finished, raising your break-even point for good. Over time that matters more than the margin on the job.
These are all questions that I have been working through with a client recently. The cash gap was eye-watering, but manageable given current working capital reserves. The permanent cost is also worth considering; if this a stepping stone to growth, those extra staff can be redeployed, or is it a one-off spike in activity?
What to do if the numbers do not work
If the stressed number is higher than the cash and facilities available to you, you have four options, and only one of them is carrying on regardless.
Change the payment structure
An advance payment, more frequent valuations, milestones tied to delivery, or a lower retention are all negotiable. Negotiate before you sign, not three months in when you have lost your leverage.
Fund it properly
Project finance, an invoice facility or an overdraft agreed in advance all cost money, but far less than an emergency arrangement made halfway through, when the lender knows you have no alternative.
Take it in stages
Phase the work, if the contract can sensibly be broken down, so the cash gap never reaches its full depth in one go.
Decline it
Turning down a contract you cannot fund is the same discipline as turning down one you cannot price, and considerably cheaper than finding out the hard way. That is not a failure of ambition.
The bottom line: a big contract is not the same as a good contract
Whether it is a good one depends on whether your balance sheet can carry it, and that is a question with a real answer rather than a matter of nerve. Remember what sits behind it: you have probably given personal guarantees, possibly secured against your house.
Work out the deepest point of the cash gap, stress it for late payment, and compare it against what you genuinely have available. If it clears, sign with confidence. If it does not, you now know what needs to change first.
If you are weighing up a job that would materially change the size of your business and you are not sure the cash works, that is worth half an hour with someone who has modelled it before.Frequently asked questions
What is overtrading?
Taking on more work than your working capital can fund. Costs go out before customer payments come in, so the bank balance falls even as the order book grows. It is a timing problem, not a profitability problem.
How long does it take to get paid on a construction contract?
Even where nothing is in dispute, 60 to 90 days from doing the work to seeing the money is common. You submit an application for payment, it is assessed and certified, and only then do the payment terms start running. Retentions are held longer still.
What are retentions and how long are they held?
A slice of each payment held back by the client as security, typically until practical completion and released in stages beyond that, so part of your margin can sit with the client for a year or more after you finish on site. The Bill would ban them, but it is not law yet.
Sources
- Insolvency Service, Company Insolvency Statistics, June 2026 (gov.uk)
- Build UK, Construction Sector Payment Performance (builduk.org), reports published July 2026
- HM Government, Small Business Protections Bill, introduced 19 May 2026 (gov.uk)
- Bank of England base rate 3.75% as at August 2026
