How Much Cash Should a Construction Company Keep in the Bank? A Practical Buffer Strategy for UK Contractors

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How Much Cash Should a Construction Company Keep in the Bank? A Practical Buffer Strategy for UK Contractors

Dec 5, 2025 | Blog

How much should I keep in the bank as a buffer?

Most construction businesses should aim for a cash buffer equal to 2–3 months of operating costs — including payroll, subcontractors, materials, and overheads. This level of reserve protects you from late payments, VAT quarters, retention delays, and unexpected cost spikes — the most common causes of cashflow stress in UK construction.

At Thomas Emlyn Ltd, creating and maintaining this buffer is one of the first goals we establish with every Virtual Finance Office client. Below, you’ll see exactly how to calculate it and how to build it without squeezing day-to-day operations.

Book a discovery call here.

What is a cash buffer and why does it matter in construction?

Short answer: A cash buffer is your “safety net” — funds kept aside to cover costs when project income slows or cash timing becomes unpredictable.**

Construction companies face unique liquidity challenges:

long payment terms (30–45 days, sometimes longer),
retentions held for up to 12 months,
subcontractors who need paying weekly,
materials that must be bought upfront,
VAT liabilities that can hit hard every three months.

This mismatch between when you pay and when you get paid makes a cash buffer essential.

The Construction Leadership Council (CLC) and Federation of Master Builders (FMB) both emphasise the importance of holding adequate working capital — especially for SMEs with volatile payment cycles.

How to calculate the right buffer for your construction business

Short answer: Calculate your average monthly operating costs, then multiply by 2–3 months.**

Your operating costs include:

PAYE wages
subcontractor labour
material purchases
plant hire
fuel
insurance
software
rent or yard costs
finance payments
VAT set-asides

Step 1: Total your monthly operating costs

Example (real anonymised client):

PAYE labour: £45,000
Subcontractors: £60,000
Materials: £50,000
Overheads (fuel, insurance, rent etc.): £28,000
Finance payments: £7,500
VAT set-aside (monthly average): £12,000

Total monthly operating cost: £202,500

Step 2: Multiply by 2–3 months

2-month buffer: £405,000
3-month buffer: £607,500

This firm settled on 10 weeks of operating cost (£465k) as their target buffer — enough to cover payroll, subcontractors, and overheads even if two big clients paid late simultaneously.

Why 2–3 months? Isn’t that too much?

Short answer: In construction, 2–3 months protects you from your biggest risks: late payments, VAT quarters, and delayed valuations.**

Here’s why a proper buffer is essential:

1. Late payments are common — even with good clients

We regularly see delays of:

14–21 days on valuations,
30–60 days on final accounts,
months on retentions.

2. VAT quarters create huge cash drains

For many contractors, VAT liability in one quarter equals 4–6 weeks of overheads.

3. Labour must be paid weekly

Regardless of client payment timing.

4. Variation disputes can freeze thousands

If variations aren’t approved immediately, the cash impact can be severe.

5. Banks rarely move quickly

Overdraft extensions take time — you need a buffer that doesn’t rely on lenders.

Construction is not like retail or consulting. Cashflow risk is baked into the model.
Your buffer is your insurance policy.

How to build a cash buffer without tightening day-to-day cashflow

Short answer: Build it gradually over 6–18 months using margin improvements, staged billing, and better labour planning.**

Below is the exact strategy we use inside Thomas Emlyn Ltd’s VFO and Virtual FD engagements.

1. Improve gross margins by 1–3%

A small margin uplift can fund your buffer faster than you expect.

Example:
A carpentry contractor improved margins from 22% → 25% by tightening labour scheduling.
This created £92k in extra annual profit, which funded a 2-month buffer.

2. Move clients to staged invoicing

Instead of monthly valuations, introduce:

fortnightly billing,
upfront deposits for materials,
staged payments tied to milestones.

This reduces the gap between when you spend and when you get paid.

3. Use a weekly 13-week cashflow forecast

This exposes pressure points before they hit — giving time to adjust.

For example:
A client forecast revealed a £68k cash dip the same week PAYE and a VAT bill landed.
The fix? Move a valuation forward by five days.
Crisis avoided.

4. Track retentions and variation approvals tightly

Unapproved variations and retention delays are silent killers of cashflow.

We build trackers that flag overdue approvals and expected release dates — improving recovery rates by up to 20–30%for some firms.

5. Set a percentage of monthly profit aside

A simple method that works well:

20% of monthly profit goes into the buffer
Continue until the target level is reached

Some clients hit their full buffer in 8–10 months.

What happens when a construction firm has no buffer?

Here’s a real (but anonymised) example from a building company that joined us in 2024.

Before (no buffer):

Paid subcontractors weekly
Clients paid 30–45 days later
VAT bill every quarter caused panic
Every delay created stress
Directors regularly used personal funds to fill gaps

After 7 months with Thomas Emlyn Ltd:

Built a £210k buffer (approx. 6 weeks of costs)
Moved 60% of clients to fortnightly billing
Improved project margins by 2.2%
No longer needed personal cash injections

Outcome: predictable, calm, stable operations.

How do I know if my current buffer is enough?

Use these questions:

1. Could you pay subcontractors and PAYE for 6–8 weeks with no client receipts?

If not, the buffer is too low.

2. Could you survive a delayed valuation and a VAT bill in the same month?

If not, you’re exposed.

3. Do you rely on overdrafts or personal cash?

If yes, you don’t have a buffer — the bank is your buffer.

4. Is your cash position volatile week-to-week?

If yes, build a buffer and reduce the swings.

What tools does Thomas Emlyn Ltd use to help construction firms build the right buffer?

Our forecasting and cashflow systems include:

13-week cashflow forecast
Weekly project profitability reporting
Material and subcontractor cost tracking
Retention and variation trackers
Pipeline weighting tools
Monthly finance meetings to review buffer progress
Cash “early warning” system for problem jobs

Using these tools, many clients build a 2–3 month buffer within their first year.

FAQ: Common Questions From Construction Directors About Cash Buffers

1. Is a buffer the same as working capital?

Not exactly.
Working capital includes invoices owed to you and bills you owe. A cash buffer is real cash, in your bank, ready to use.
We recommend separating the two in planning.

2. Should I keep the buffer in a separate bank account?

Yes.
It removes temptation and makes reporting clearer.
Several UK contractors use an instant-access savings account or “buffer pot” within their banking app.

3. What if my business is too small to build a buffer?

Even small firms can build a buffer gradually.
We often start with 1 week of operating costs, then build toward 2–3 months over time.
Small, consistent steps beat big jumps.

4. What if my cash is tied up in retentions and slow clients?

This is common.
We help clients tighten variation approvals, chase retentions proactively, and change billing structures — freeing cash that’s already been earned.