Construction works very differently from most other industries. Projects can last for months or even years. Costs usually build up at the start, with large spending on materials, labour, and equipment before any payments are received. When you add delays, contract changes, and complicated payment terms, problems can easily go unnoticed until they become serious.
This is why construction accounting needs its own early-warning system. These alerts, or “red-flag metrics,” help you spot issues quickly instead of waiting for the year-end accounts. Careful monitoring reveals early warnings of dropping profits, late payments, increasing expenses, or projects exceeding budgets.
Margin Erosion (Gross + Net Profit Margins)
Profit margins show how well your construction business is performing. Gross margin measures earnings after direct costs like materials, labour, and subcontractors. Net margin shows what’s left after all expenses, including overheads and taxes. Margins can shrink quickly in construction due to rising material costs, labour overtime, or project delays. Even small estimating errors can eat into profits.
Red flag: margins getting smaller over time or consistently below estimates. This signals slipping costs, under-priced jobs, or inefficiencies. Monitoring gross and net margins helps catch problems early before a profitable job turns into a loss.
Cash Flow – When You’re Profitable But Running Out of Money
Even profitable construction projects can struggle with cash flow. High upfront costs for materials, labour, and equipment, combined with delayed client payments and retentions, make it hard to pay suppliers, staff, and subcontractors on time.
Red flags: negative cash flow, frequent short-term loans, late supplier payments, or relying on future invoices to cover current costs. Keeping a close eye on cash flow helps you spot problems early, avoid delays, and keep your business financially strong.
Job-Costing Variance – When Estimated Costs and Actual Costs Drift Apart
Job costing is a key tool in construction accounting. It tracks all project costs, including materials, labour, subcontractors, equipment, and unexpected expenses, helping you price work accurately and see which projects are profitable.
Red flag: actual costs consistently exceed estimates, due to labour overruns, rising material prices, or unplanned work.Even small variances can turn a profitable job into a loss. Monitoring job-costing variances helps spot issues early, improve estimating, and keep projects on budget.
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Work-in-Progress (WIP) & Unbilled Revenue Risk
WIP represents the value of work your team has completed but hasn’t yet been billed. In construction, this is normal because projects take time, and invoicing often follows stages or milestones. Tracking WIP helps you see what has been earned, what’s owed, and whether projects are progressing as planned.
Red flags: WIP growing without invoices, many unbilled or partially billed jobs, or rising costs on ongoing projects.
Unchecked WIP can hide financial issues. Projects may appear profitable on paper, but delayed billing ties up cash, reduces liquidity, and threatens profitability. Keeping WIP under control helps you invoice on time, report revenue accurately, and understand your business’s true financial position.
Delayed Payments & High Receivables – When Clients Hold You Up
Timely payments from clients are essential to keeping construction projects on schedule and your business financially healthy. Track receivables turnover and days sales outstanding (DSO) to see how quickly clients pay.
Red flags: DSO increasing, invoices unpaid for 60–90 days, or multiple overdue accounts at once. These indicate slow-paying clients or potential disputes holding up cash. High receivables tie up funds needed for payroll, materials, and subcontractors. Even profitable projects on paper can cause cash flow issues if payments are delayed.
Contract Overrun & Retention Exposure – When Projects Go Off Track
Construction projects can go over time or over budget, even with careful planning. Contractors often face retentions, where part of the payment is held until the work is fully completed. Projects can also have changes, variations, or disputes that increase costs and delay payments.
Red flags: high unpaid retentions, frequent contract changes, or many projects going over time or budget. Keeping an eye on these issues helps protect cash flow, maintain profits, improve client relationships, and keep projects running smoothly.
Final Thought
Monitoring these six red-flag metrics will give UK contractors a strong early warning system against financial problems. Keeping an eye on project profits, cash flow, payment delays, rising costs, and budget changes helps contractors stop small issues before they turn into major setbacks. The fast pace of construction work and tight margins make frequent financial reviews necessary.
Cartwheel International offers free consultation for UK contractors who want clearer control over project finances. Our team helps you track the right metrics, protect profits, improve cash flow, and keep every project running smoothly.
