Turning Construction Financial Noise into Transaction Value

Situation

A newly onboarded construction client engaged CBIZ to prepare for a sale to a private equity buyer. Early in our Quality of Earnings (QoE) work, we identified irregular trends that would undermine valuation and deal certainty if left unaddressed.

What the initial QoE revealed

• Large, unexplained swings in monthly gross profit over a four-year period.
• Spikes and troughs in general and administrative expenses (G&A) that did not align with operating activity.
• Significant month-to-month volatility in profitability driven by inconsistent project estimates and cut-offs.

Recognizing the depth of the issues, we brought in our Client Accounting & Advisory Services (CAAS) team to rebuild a reliable monthly view, including WIP-to-GL tie-outs and balance sheet reconciliations.

Root causes we found

Equipment expensed to jobs instead of capitalized:

• To minimize taxable income, the company charged equipment purchases directly to job costs.
• This depressed project margins and EBITDA. Had the equipment been recorded as fixed assets, the company would still have received a tax benefit through depreciation, while reporting operating profitability accurately.

Overstated cost-to-complete estimates:

• Project teams repeatedly overestimated remaining costs, suppressing percent-of-completion revenue and margin month after month.
• At project closeout, actuals trued up, causing sharp profit spikes—creating a “sawtooth” earnings pattern that alarms buyers.

Personal and non-operating spend in G&A:

• Owner-related and non-business expenses flowed through operating accounts, creating artificial volatility in overhead and understating normalized EBITDA.

Unbilled work on owners’ real estate:

• The construction entity performed work on properties owned by related real estate entities without billing or intercompany recognition.
• This understated revenue and margin in the construction company and misstated the true cost basis at the real estate entities.

In total, approximately $3 million of costs per year were misclassified or misallocated in ways that depressed normalized earnings.

What CBIZ did

Reconstructed monthly financials and WIP:

• CAAS performed a month-by-month tie-out of contract assets/liabilities, AR/retention, under/overbillings, and WIP to the general ledger.
• Rebuilt EACs and corrected percent-of-completion revenue recognition to align with actual progress and approved change orders.

Fixed asset and equipment policy:

• Implemented a capitalization policy, created a fixed asset register, and established internal equipment charge rates for consistent job costing.
• Adjusted historical financials to reclassify equipment purchases from job costs to fixed assets with appropriate depreciation.

SG&A cleanup and add-backs:

• Implemented expense policies and controls to route personal/non-operating costs to distributions or related-party accounts.
• Documented discrete add-backs for QoE with supporting evidence.

Intercompany and related-party governance:

• Established billing protocols and intercompany agreements for work performed on owners’ real estate.
• Adjusted historical periods to reflect revenue and cost transfers with proper documentation.

Close and forecasting discipline:

• Introduced a monthly close calendar, PM sign-offs on EAC changes, and a standard WIP pack with variance explanations.
• Built a KPI dashboard tracking margin fade/gain, under/overbillings, DSO/retention, and backlog quality.

The impact on earnings and value

Normalized EBITDA uplift:

• Approximately $3 million per year in costs were reclassified, removed from operating expense, or treated as add-backs, increasing normalized EBITDA.

Reduced volatility and increased buyer confidence:

• Stabilized gross margins and predictable monthly results improved the credibility of earnings and reduced diligence risk.

Valuation effect:

• Using illustrative transaction multiples common in the sector (e.g., 5x–10x EBITDA), a $3 million EBITDA uplift translates to roughly $15 million–$30 million in enterprise value. Actual outcomes depend on buyer, risk profile, and market conditions, but the order of magnitude demonstrates how accounting integrity and proper classification directly affect price.

Lessons for contractors preparing to transact

• Capitalization matters: Equipment belongs on the balance sheet with depreciation—not buried in job costs—so operating performance is clear while tax benefits are preserved.
• Keep EACs current: Systematic, documented EAC updates prevent margin “snap-backs” that erode credibility.
• Clean SG&A and related-party activity: Remove personal expenses from operations and formalize intercompany billing to reflect true economics.
• Close with WIP rigor: Monthly WIP-to-GL tie-outs and project management variance narratives are essential to defend earnings quality.

This project moved the client from a position of explaining away volatility to presenting a stable, well-supported earnings profile. The result was a smoother diligence process and a stronger platform for negotiating value.