Key takeaways
- WIP schedules are the primary financial diligence document in a project-based business sale. Disorganized or inconsistent WIP records are the single most common reason diligence takes longer and valuations are adjusted.
- Over-billing (billing in advance of completion) creates a liability on the balance sheet that buyers factor into purchase price adjustments at closing.
- Project gross margin by job is what buyers care about, not average company margin. High variance in project profitability is a red flag.
- Percent-completion accounting requires consistent methodology across all projects and all periods. Methodology changes mid-stream are a diligence finding.
- Backlog quality, not just backlog size, is what buyers evaluate. Contracts with low margins, high change order risk, or customer concentration issues reduce the value of the backlog.
60–70%
Of project business QoEs require WIP restatement or adjustment
8–15%
Average project gross margin variance across jobs in a middle market construction firm
$1.5M–$4M
Typical purchase price adjustment tied to WIP issues in a $20M project business sale
24 months
Minimum WIP history buyers want to review
When a buyer evaluates a subscription software company, they focus on ARR, churn, and net revenue retention. When they evaluate a construction firm, a staffing company, or an engineering services business, the equivalent analysis is the WIP schedule. Work-in-progress accounting is how project revenue is recognized, and it is the most scrutinized financial document in a project-based business transaction.
Most founders of project businesses understand their WIP schedule operationally, tracking which jobs are open, what has been billed, and what is remaining. What they underestimate is the financial accounting rigor that buyers and their QoE accountants will apply to that schedule during diligence.
How percent-completion accounting works and why buyers scrutinize it
Under percent-completion accounting (governed by ASC 606 for most private companies), revenue is recognized in proportion to how much of the project has been completed. A $1M contract that is 40% complete has $400K of recognized revenue, regardless of how much has been billed.
The challenge is that "percent complete" must be estimated, either by cost incurred versus total estimated cost (cost-to-cost method) or by physical milestones. Each method requires judgment, and that judgment can be applied aggressively or conservatively.
The three WIP accounting problems buyers look for
1. Optimistic cost-to-complete estimates
A contractor estimates $200K of remaining costs on a job that has already consumed $800K of a $900K budget. If the actual remaining costs are $350K, the job will finish at a loss. Buyers look at historical job closeout data to determine whether cost-to-complete estimates have been consistently accurate or consistently optimistic.
2. Over-billing relative to completion
A contractor bills 80% of a $500K contract in month one but has only completed 50% of the work. That $150K overbill is a liability, not revenue. On a portfolio of 30 open jobs, overbilling can aggregate to $1M–$3M of balance sheet adjustments that reduce the purchase price.
3. Inconsistent completion methodology
If the company switched from milestone-based recognition to cost-to-cost in year two of the review period, revenue comparability across years is impaired. Buyers will ask why the methodology changed and whether the prior periods would be materially different under the current methodology.
Buyers do not take WIP schedules at face value. They will reconcile the WIP schedule to the general ledger, to billings, and to cost records for a sample of projects. Gaps between any of those sources create adjustments.
What to prepare before banker engagement
A project-based business going to market should prepare a clean, auditable WIP schedule covering at least 24 months of completed and open jobs. That schedule should show, for each project: contract value, billings to date, revenue recognized to date, costs incurred to date, estimated costs to complete, and projected total margin.
WIP preparation checklist
Job-level gross margin by project
At least 24 months; show completed jobs with final actual margin versus estimated margin at contract signing
Billings versus revenue reconciliation
Reconcile billing to revenue recognition for all open projects; document over-billing and under-billing positions
Cost-to-complete documentation
For each open project, document the basis for the cost-to-complete estimate and who is responsible for that estimate
Change order log
Track approved and pending change orders by project; unapproved change orders that are included in revenue are a finding
Backlog schedule
All signed contracts not yet started or in progress, with contract value, expected start date, and estimated margin
Project closeout data
Last 24 months of completed projects showing estimated margin at contract signing versus actual margin at closeout
"A $22M specialty contractor went to market with a buyer-provided LOI at 7.5x EBITDA. During diligence, the buyer's QoE team identified $1.2M of overbilling on open jobs, $400K of cost-to-complete underestimates on three troubled jobs, and $600K of unapproved change orders included in contract value. The net purchase price adjustment was $2.8M, reducing the effective multiple from 7.5x to 6.3x. The founder had been unaware that the WIP schedule was being maintained on a cash billing basis rather than a percent-completion basis."
How backlog is valued and what reduces it
Backlog, the value of signed contracts not yet started or in progress, is treated as a forward-looking quality indicator in a project business sale. A buyer who pays for a company with $15M of backlog is effectively acquiring that revenue pipeline, and they will want to understand how likely that backlog is to convert at the expected margins.
Backlog quality factors buyers evaluate
Margin quality
Average estimated gross margin on backlogged projects. Backlog with 8% expected margins is worth less than backlog with 18% expected margins, even at the same dollar value.
Contract type
Fixed-price contracts carry more risk than cost-plus or time-and-materials. A $5M fixed-price job in a cost environment where material prices are volatile is a different risk profile than a $5M T&M contract.
Customer concentration
If 60% of backlog is from one customer, a lost relationship eliminates the forward revenue base. Buyers will probe whether the customer has committed to the relationship post-close.
Cancellation history
Has any backlog been cancelled in the last three years, and under what circumstances? Buyers want to see a stable conversion rate from signed contract to completed revenue.
Contract assignability
Are the contracts assignable to a buyer without customer consent? Many government contracts, public utility work, and large commercial contracts require consent. Consent requirements create closing risk.
A business with $15M of backlog and clean margins, diversified customers, and clear assignability will command a premium over a company with the same backlog but margin variance, customer concentration, and assignment restrictions.
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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