Use Case
Quality of Earnings for Construction and Trades Acquisitions
Construction and trades businesses carry diligence issues that a general Quality of Earnings approach can miss. Revenue recognition, retainage, work in progress, and the equipment needed to keep earning all behave differently here than in a service or retail business. If you are buying a contractor, these are the areas where the real number lives.
Percentage-of-completion revenue
Contractors often recognize revenue as a job progresses rather than when it is billed or collected. Done well, percentage-of-completion gives a fair view of earnings. Done loosely, it can pull profit forward or push cost back, which overstates the trailing earnings a buyer is pricing. We test how revenue tracks against actual job costs to see whether the recognized number is real.
Retainage on both sides
Money held back on a job, retainage, sits on the balance sheet as a receivable or a payable that may not convert on a normal timetable. It affects both the earnings picture and the working capital peg. Treating it like ordinary receivables is a common way to misstate the cash the business actually needs.
Work in progress that does not reconcile
The work-in-progress schedule is where over- and under-billing live. A WIP schedule that does not reconcile to the financial statements is a signal to dig, because it can hide both inflated earnings and looming cash needs. A proof of cash helps confirm what was really earned and collected.
Maintenance and replacement capex
Asset-heavy trades run on fleet and equipment. The question that decides the deal is simple: what does the buyer have to spend to keep earning that EBITDA? Equipment near the end of its life is a cost the seller’s historical numbers may not show. Cash is king in these businesses, and replacement capex is where it goes.
Why volume matters here
These are not exotic issues, but they are specific, and recognizing them quickly comes from having seen many of these deals. A provider who does construction and trades acquisitions regularly knows where to look before the WIP schedule is even open.
Frequently asked questions
How is revenue recognition different for a contractor?
Many contractors use percentage-of-completion, recognizing revenue as a job progresses. The analysis tests that recognition against actual job costs to confirm the earnings are real.
Does retainage affect the working capital peg?
Yes. Retainage held on jobs does not convert on a normal timetable, so treating it as ordinary receivables can misstate the cash the business needs at close.
What is replacement capex and why does it matter?
It is the spend required to keep fleet and equipment earning. In asset-heavy trades it can be significant, and the seller’s historical numbers may not reflect it.
Where to next
See the Quality of Earnings due diligence guide for the full method, or the working capital mistakes that hit asset-heavy deals hardest. To diligence a construction or trades target, contact our transaction advisory team.
