A subcontractor on a 40-week programme can have three months' work on site before the first certified payment arrives, and 5% of everything it earns held back until a year after the job is finished. Standard invoice factoring was designed for goods delivered and invoices issued. Construction needs something built around how the sector actually gets paid.
How construction businesses get paid
Most construction work is paid in stages. A subcontractor submits an application for payment each month valuing the work done to date. The main contractor or its quantity surveyor (QS) certifies a figure, often less than applied for, and a payment notice states the sum due.
Application for payment: a valuation claiming the amount a contractor believes is due for work completed. It is a claim, not an agreed debt, until it is certified or a payment notice is issued.
The Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), as amended in 2011, requires every construction contract to have an adequate payment mechanism with due and final dates, a right to stage payments on contracts over 45 days, and a right to suspend for non-payment. A paying party wanting to pay less than the notified sum must issue a pay-less notice before the final date for payment; if it does not, the full sum becomes payable. Three further features complicate any funding arrangement:
- Retentions
Typically 3% to 5% of each certified sum is withheld: half released at practical completion, half after the defects period, commonly 12 months later.
- Contra charges
A main contractor can set off its own costs (scaffold use, skips, remedial work by others, delay) against sums due. A £30,000 certificate can become £22,000 by the time it is paid.
- Subcontractor chains
Payment flows from client to main contractor to subcontractor and below. Each tier waits on the one above, and a main contractor's insolvency leaves everyone beneath it unpaid for work already done.
Where the cash-flow pressure comes from
Labour is paid weekly, merchants want 30 days and plant hire is billed monthly in advance. Against that, a subcontractor applies monthly, waits for certification, then waits for the final date for payment. Sixty to ninety days from doing the work to banking the money is normal, before any pay-less notice or contra reduces the sum. The risk funders fear most is main-contractor insolvency: subcontractors are unsecured creditors for certified sums, uncertified work and retention, and often recover pence in the pound.
Why many providers decline or restrict construction
A mainstream factoring provider wants an undisputed invoice for a completed delivery. Construction debt fails that test several ways at once:
- Applications can be cut by pay-less notices, so the sum applied for is not the sum paid.
- Retention is deducted from every payment and tied up for months or years.
- Contras and set-off can reduce a certified sum after it has been funded.
- Ledgers are concentrated on two or three main contractors, breaching usual 25% to 30% concentration limits.
- Many subcontracts prohibit assignment, which can prevent the debt being sold without consent.
Generalist providers therefore exclude construction, cap it at a small share of their book, or fund only supply-only invoices such as a fabricator delivering steel to site rather than installing it.
What specialist construction finance providers do differently
Several UK providers run dedicated construction finance facilities. They are still invoice finance, but adapted:
Lower advance rates
Often 50% to 70% of the certified or applied-for amount, rather than 70% to 90%. The gap is the cushion against pay-less notices, contras and retention.
Funding against applications
Some specialists advance against uncertified applications, giving earlier cash at a lower rate and higher cost. Others fund only once a payment notice or certificate exists.
QS verification
The provider's own or panel quantity surveyor reviews the contract, the application and the work done, with a contract review at set-up and periodic audits.
Contract-by-contract approval
Each subcontract is approved individually, including payment terms, retention percentage and any assignment clause. New contracts are added as they are won.
Most construction facilities are disclosed factoring rather than confidential, because the main contractor must acknowledge the assignment. Selective invoice finance on single certified invoices can suit a business that only needs help on one large job.
CIS deductions and the fundable amount
Under the Construction Industry Scheme (CIS), a contractor deducts tax from the labour element of payments to a registered subcontractor (20%, or 30% if unverified) and pays it to HMRC. The provider calculates its advance on the expected net receipt, not the gross invoice. Subcontractors with gross payment status receive the full amount and tend to see a higher fundable value.
Eligibility for construction factoring
- A limited company; sole traders and small partnerships can fall within Consumer Credit Act rules, which many providers avoid.
- Turnover often from around £250,000, with larger facilities commonly starting at £1m.
- Written subcontracts (JCT, NEC or bespoke) with Construction Act-compliant payment mechanisms.
- Main contractors of reasonable credit standing; each is credit-checked and given a limit.
Trade subcontractors working for a spread of main contractors are easiest to fund; anyone with one main contractor above half the ledger will find fewer options. The general eligibility guide covers the rest.
Costs and limitations
Construction finance costs more than a standard facility because the provider does more work and carries more risk. Published market ranges suggest service fees of roughly 1% to 3% of value funded, discount charges of around 2% to 5% over base rate or SONIA on funds drawn, plus survey fees for the QS work, arrangement fees of 0.5% to 1% of the limit and minimum monthly fees. Fees vary by provider and by the quality of your contracts; read the guide to invoice factoring costs before comparing quotes.
Advantages
- Cash against applications or certificates weeks before the final date for payment.
- Facility grows as new contracts are approved.
- QS review can catch contract and payment-term problems early.
Disadvantages
- Advance rates of 50% to 70% leave a large retained balance.
- Retentions are almost never funded.
- Contras and pay-less notices after funding create repayment demands under recourse terms.
- Higher fees, survey costs and more intrusive verification.
Worked example: an M&E subcontractor
Illustrative example Monthly application on a £600,000 subcontract
- Application for payment (month 4)
- £85,000.00
- Certified by main contractor's QS
- £80,000.00
- Less 5% retention
- £4,000.00
- Less contra charge (scaffold hire)
- £1,500.00
- Net sum due (gross payment status, no CIS deduction)
- £74,500.00
- Initial advance (65% of net certified sum)
- £48,425.00
- Service fee (2% of certified value)
- £1,600.00
- Discount charge (approx. 45 days at 4% over base, base assumed 4%)
- £477.00
- Balance released when main contractor pays
- £23,998.00
Figures are illustrative estimates only and do not represent a finance offer. The £4,000 retention sits outside the facility and is paid in two stages after practical completion and the end of the defects period.
Working on subcontracts with slow or uncertain payment?
Tell us about your contracts and main contractors and we will explain which construction finance structures may be worth enquiring about.
Frequently asked questions
Can applications for payment be factored?
Not with most mainstream facilities, because an application can be reduced by a pay-less notice and so is not an undisputed debt. Specialist construction finance providers may fund applications at a lower advance rate after their own surveyor has checked the valuation. Once a sum is certified it becomes much easier to fund.
Why do many invoice finance providers decline construction businesses?
Because the debt is rarely clean. Pay-less notices, retentions, contra charges and prohibitions on assignment all mean the sum invoiced may not be the sum paid, and main-contractor insolvency can wipe out a whole ledger. Generalist providers often cap or exclude the sector, which is why specialist construction finance exists.
Are retentions funded under construction factoring?
Generally not. Retention, typically 3 to 5 per cent of each certified sum, is conditional and long-dated, with half released at practical completion and half after the defects period. Most providers exclude it from fundable value, although a few specialists consider separate retention funding as the defects period nears its end.
How do CIS deductions affect the amount advanced?
A contractor deducts 20 per cent (30 per cent if unverified) from the labour element of a payment and passes it to HMRC, so the provider only ever receives the net amount. Advances are therefore calculated on expected net cash. Subcontractors with gross payment status avoid the deduction and usually see a higher fundable value.
What advance rate can a construction business expect?
Published market ranges for construction are typically 50 to 70 per cent of the certified or applied-for amount, against 70 to 90 per cent for a standard trade debtor. The rate depends on whether certified invoices or uncertified applications are funded, the contract terms, your main contractors and the provider's appetite.
Next steps
Gather your current subcontracts, recent applications and certificates, and a list of main contractors with balances outstanding; set-up often takes three to four weeks. If a main contractor is already late, read what happens if a customer does not pay, then request a quote or browse other industry guides.