When a construction company heads into a sale, recapitalization, or strategic partnership, the headline valuation is won or lost in the details of its financials. For contractors, value is a function of disciplined project accounting, predictable cash conversion, and evidence that earnings are sustainable. Convert operational precision into negotiating power by implementing rigorous financial processes, performing construction-specific Quality of Earnings (QoE) analyses, and deploying practical AI to elevate both performance and buyer confidence.
What a Quality of Earnings Is and Why It Matters
A Quality of Earnings analysis examines the sustainability and accuracy of a company’s earnings. Unlike an audit, which opines on historical financial statements, QoE focuses on:
- Identifying any financial, operational or GAAP compliance issues and ensuring that they are addressed before going to market.
- Normalized EBITDA: Removing one-time, non-recurring, owner-related, and non-operating items with the intention of ensuring that the adjustments identified are defensible and supported.
- Earnings sustainability for an understanding of the drivers of margin, backlog quality, and customer concentration.
- Working capital to establish a normalized “peg” and identify seasonality and contract asset/liability dynamics.
- Cash conversion to reconcile earnings to cash, including the impact of underbillings/overbillings and retention.
For contractors, QoE is indispensable because percentage-of-completion revenue recognition, change orders, and WIP accounting can materially affect reported results. A strong QoE can enhance creditability with potential buyers, increase deal certainty, shorten diligence cycles, and support a valuation premium.
The contractor-specific QoE lens
Construction-focused QoE digs into areas that generalist diligence professionals can often miss, like:
Revenue recognition (ASC 606): To ensure revenue recognition aligns with project progress, construction focused QoE includes a lookback analysis recalculating revenue for each project based on the actual timing of cost incurrence and the alignment of percent complete, cost-to-complete estimates, and cut-off.
A QoE analysis highlights patterns of gains or fades on projects, providing insight into the reliability of estimates and management’s forecasting accuracy. Professionals help contractors get ahead of this and be prepared to answer buyer questions.
- The job estimation process: Evaluating reasons for estimate changes over the life of a job.
- WIP integrity: Reconciliation of over/under billings on the WIP schedules to the balance sheet and understanding the impact of change orders and job cost estimate changes.
- Change orders and claims: Status (approved, unapproved, disputed), collectability, and timing.
- Backlog quality: Mix, margins, burn rate, and risk (by customer, geography, project type).
- Job cost discipline: Understanding allocation of indirect costs, equipment rates, burden, and field overhead.
- AR/retention aging: Recoverability, lien waivers, pay-if-paid clauses, and contingencies.
- Related-party and owner spend: Identifying non-operating, discretionary, and personal charges for add-backs.
- Concentration and risk: Key customer/vendor reliance, bonding capacity, and subcontractor exposure.
The result is a clear bridge from reported earnings to what a buyer can reasonably expect going forward.
Why Monthly Close and WIP Discipline Drive Value
A fast, repeatable monthly close with robust contract and WIP schedules serves as the foundation on which financial credibility is built. Buyers pay a premium for clean data and consistent execution.
What “done right” looks like:
- Monthly close calendar: Define cut-offs for accounts payable (AP) and accounts receivable (AR), job cost accruals, equipment allocations, and revenue.
- Full contract/WIP schedules by job:
- Original and revised contract value
- Costs to date and cost-to-complete
- Revise cost-to-complete estimates monthly and adjust WIPs accordingly, tracking reasons for large upward or downward adjustments, as this will come up in buy-side diligence.
- Percent complete and earned revenue
- Billed to date, retention, and under/overbillings
- Estimated at completion (EAC) and margin analysis
- Reconciliations: WIP to general ledge (GL) tie-outs; AR/retention aging matched to project billings and contracts.
- Job reviews: Sign offs from project managers on EAC changes and margin movements; exceptions escalated.
- Change orders: Tracked by status with clear recognition policies (approved vs. probable vs. disputed).
- Forecast cadence: Monthly cash and margin forecasts, backlog burn-down, and working capital projections.
- Balance sheet account reconciliations: Ensure that all significant balance sheet accounts are reconciled monthly and can be supported.
Why it matters in a transaction:
- Buyers want to see accurate monthly income statements and balance sheets.
- Transactions are often based on a trailing twelve months EBITDA (TTM), which often does not align with a calendar year.
- Reduces surprises in diligence and strengthens buyer trust.
- Supports a higher working capital peg by demonstrating predictable cash needs.
- Evidences repeatability of earnings—key to justifying a stronger EBITDA multiple.
Keep Personal and Non-Operating Costs Out of the Books
Nothing erodes credibility faster than personal or non-operating spend embedded in company results. Common issues include:
- Owner perquisites: Vehicles, travel, meals/entertainment, club dues, personal insurance, household expenses.
- Family payroll and benefits: Compensation not tied to bona fide services.
- Related-party transactions: Above-market rents, management fees, or intercompany charges lacking support.
- One-off items: Litigation, consulting, or equipment disposals booked in operating expenses.
- Capital vs. expense: Misclassifying tools/equipment or major repairs distorts EBITDA and tax posture.
CBIZ helps establish clear expense policies, card controls, accountable plan documentation, and workflows that route questionable items to distributions rather than operating expense. Where appropriate, we document add-backs for QoE but the strongest position is clean books without the need for heavy normalization.
How CBIZ Transforms Value: A Construction-Focused Readiness Playbook
Here’s how CBIZ’s Construction team pairs industry accounting with transaction and tax experience to prepare companies months ahead of a deal:
- Sell-side QoE and pre-diligence: Identify EBITDA adjustments, WIP issues, and working capital norms before buyers do.
- Close optimization: Design a 5–10 business day close, WIP tie-outs, PM signoffs, and change order governance.
- Job cost structure: Standardized cost codes (e.g., CSI bases), burden policies, and equipment charge rates.
- KPI dashboards: Visualize margin fade/gain by job, WIP-to-GL reconciliation, under/overbilling trends, days sales outstanding (DSO)/retention, backlog quality.
- Working capital peg support: Seasonality analysis and contract asset/liability treatment tailored to contractor norms.
- Tax and structuring: Methods changes, state/local considerations, and sell-side tax planning to preserve deal value.
- Post-close 100‑day plan: Reporting cadence, lender covenants, and board-ready management reporting.
Quick Reference: Common QoE Pitfalls in Construction (and How to Avoid Them)
Raise or maintain credibility as a transaction target by ensuring you can:
- Recognize unapproved change orders: Tie revenue to approved scope or documented probability thresholds; track separately.
- Avoid stale EACs: Require monthly PM updates with evidence (subcontract status, productivity, buyout).
- Identify underbilling as a “hidden” cash drain: Monitor underbilling aging and root causes (slow approvals, incomplete SOVs, and missed milestones).
- Treat retention and AR appropriately: Age separately, apply collectability reserves, and forecast release timing.
- Properly allocate equipment costs: Define internal charge rates and ensure consistent job burden application.
- Control related-party leakage: Benchmark terms and document add-backs; avoid burying in COGS or indirects.
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“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.
