Buying a construction business: what to check in the numbers
Short answer
When buying a construction company, rely on the work-in-progress (WIP) schedule and backlog as much as the P&L: profit on open jobs depends on estimates, and over or under billings show whether profit was recognized ahead of the work. Check bonding capacity and whether it rests on the seller's personal indemnity, contractor licences and qualifiers, customer and GC concentration, retainage and receivables, change-order disputes, and who estimates and runs jobs.
Construction companies can be very profitable and very hard to diligence. The P&L reflects estimates on unfinished jobs, and the people who make those estimates are often the people leaving.
Read the WIP and backlog
| Item | What to check |
|---|---|
| WIP at each of the last 3 year-ends | Estimated margins vs final margins on completed jobs ("fade") |
| Over/under billings | Large underbillings may mean optimistic estimates |
| Backlog | Signed work, expected margin, customer mix |
| Change orders | Pending and disputed amounts |
| Retainage receivable | Age, disputes, collectability |
| Warranty and defect claims | Open and historical |
Worked example: margin fade on a WIP schedule
On an open job, the company estimates the total cost to finish and recognizes profit as work progresses. If those estimates are too rosy, profit is pulled into the years before the sale and the losses show up after you own it. The test is to compare the margin each job was showing on the WIP schedule at one year-end with what it actually earned when it closed.
Illustrative example, not a real company
At last year-end, Job 14 had a $2,000,000 contract, $1,200,000 of costs to date and an estimated $500,000 to complete, so an estimated total cost of $1,700,000 and a 15% margin ($300,000 ÷ $2,000,000). At 1,200,000 ÷ 1,700,000 = 71% complete, the company recognized 71% of $300,000, about $212,000 of profit, in that year. The job actually finished at $1,880,000 of cost: a 6% margin, $120,000 of profit in total. So the next year had to absorb about $92,000 of loss on that job ($120,000 − $212,000). If most jobs fade like that, the seller's best year was partly borrowed from the year you'd own.
People, licences and bonding
- Licence holders and qualifiers. State contractor licences often depend on a qualifying individual; if that's the seller, line up a replacement before closing.
- Estimators and project managers: tenure, pay and whether they'll stay. In many small contractors the owner estimates every job.
- Bonding: a letter from the surety on current capacity, and what it will require of you. Sureties typically want the owners' personal indemnity, so the bonding line effectively resets with you.
- Safety: OSHA construction standards (29 CFR 1926) apply on site; ask for injury logs, citations and the workers' comp experience modifier.
- Subcontractor agreements, insurance certificates and lien waivers.
Construction company valuation multiples: what drives them
Construction companies are usually valued on earnings averaged over several years, because results swing with projects. We don't publish multiple ranges, because we couldn't verify reliable public figures; for an SBA deal the lender orders an independent valuation, and appraisers adjust comparable sales for these factors:
| Factor | Supports higher | Pulls lower |
|---|---|---|
| Backlog | Signed, profitable, diverse | Thin, low-margin, one big job |
| WIP accounting | Percent complete supported; little fade | Large underbillings, optimistic estimates |
| Bonding | Capacity based on company strength | Relies on seller's personal indemnity |
| Customers | Many GCs or owners, repeat work | One GC or developer dominates |
| Estimating | Estimators on staff | Owner bids every job |
| Licences | Held by staying employees | Held only by seller |
| Earnings history | Consistent over cycles | One great year after weak ones |
What an SBA lender will check
Lenders will verify tax returns against IRS transcripts and use historical earnings, not projections, to test debt coverage. In construction they focus on WIP, backlog, bonding and concentration, and on whether the earnings depend on the seller's estimating and relationships. If the business purchase price is $3 million or more, SBA rules require a Quality of Earnings report for the lender on initial acquisitions, and in construction that report will spend a lot of time on WIP. See SBA QoE requirement.
Overbillings and underbillings: what they tell you
A WIP schedule compares what has been billed on each job with the revenue the work done so far has earned. The difference shows up on the balance sheet, and it matters to a buyer.
Illustrative example, not a real job
A job has a $500,000 contract and an estimated cost of $400,000. Cost to date is $200,000, so the job is 50% complete and has earned $250,000 of revenue. The company has billed $300,000. It is overbilled by $50,000: it has collected cash for work it has not done yet. That $50,000 is a liability. Whoever owns the company after closing has to finish the work without being paid for it again.
Overbillings across the WIP schedule are cash the seller has received for work you will perform, so the purchase agreement should deal with them, for example through the working capital adjustment. Large underbillings are the opposite risk: revenue recorded but not billed, which may mean billing disputes or cost overruns not yet recognised. Ask about any job with either.
Warranty and callback exposure
Construction work comes with warranty obligations, and defect claims can arrive years after a job is finished. Ask for a list of open warranty periods, callbacks in the last three years and their cost, and any claims or lawsuits. In an asset purchase, decide in the agreement who handles warranty work on jobs finished before closing, and who pays for it.
Red flags specific to construction companies
- Underbillings growing relative to revenue.
- Old retainage and change orders in dispute.
- A backlog dominated by one GC or developer.
- Bonding that depends entirely on the seller's personal indemnity.
- An estimator or project manager planning to leave or start a competitor.
- Liens filed by subcontractors or suppliers on recent jobs.
Documents to request
- Three years of tax returns, financial statements (reviewed or audited if available) and bank statements.
- WIP schedules at the last three year-ends and the latest month-end; final cost reports for completed jobs.
- Backlog list with contract value, expected margin and customer.
- Contracts, change orders, pay applications, lien waivers; receivables and retainage aging.
- Surety letter on bonding capacity; insurance policies and loss runs; workers' comp experience modifier.
- Licences and qualifiers; OSHA logs and citations.
- Equipment list with ages, hours, liens; subcontractor agreements and insurance certificates.
- Warranty claims, disputes, liens and litigation.
The first 90 days after you buy
Finish the jobs in progress well; they're your references for the next bid. Keep estimators and project managers, confirm bonding and insurance are in place for your entity before bidding, and meet the key GCs and owners with the seller. Track each open job's cost to complete weekly against the WIP schedule you bought on, so fade shows up early.
Questions to ask the seller
- Can I see WIP schedules at the last three year-ends and final cost reports for each job?
- Which jobs lost money, and why?
- Who estimates, and what is your bid win rate?
- What bonding capacity do you have, and what has the surety said about a sale?
- Are there open warranty claims, change-order disputes or liens?
- Who holds the licences, and will they stay?
Frequently asked questions
Why is the WIP schedule so important?
Construction profit is often recognized as work progresses, based on estimated costs to complete. If estimates are optimistic, past profit is overstated and losses appear later, after you own the company.
What is retainage?
A portion of each payment held back by the customer until a project is complete. It's real money owed to the business but collected later, sometimes after disputes.
Does bonding transfer?
Sureties underwrite the company and usually its owners. A new owner must typically establish their own bonding relationship, which affects which jobs can be bid.
How is a construction business usually bought?
Often as an asset purchase or with careful stock purchase protections, because of warranty and defect claims from past projects.
What drives construction company valuation multiples?
Backlog quality, how WIP is accounted for (over and under billings), bonding capacity and whether it depends on the seller's personal indemnity, customer and GC concentration, estimating depth, licences and equipment. Earnings are usually averaged over several years. We don't publish multiple ranges we can't verify; appraisers adjust comparable sales for these factors.
How do I verify a construction company's revenue?
Match revenue to contracts, pay applications, change orders and lien waivers, then to bank deposits and tax returns. For open jobs, compare the WIP schedule's costs to date with job cost reports and supplier invoices. Ask for final job cost reports on completed jobs to measure margin fade.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (QoE: cash vs accrual; revenue sustainability)
- eCFR 29 CFR Part 1926 (OSHA construction safety standards)
- OSHA: Construction industry standards (29 CFR 1926)
- OSHA: Recordkeeping (injury and illness logs)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.