How WIP Reporting Impacts Construction Business Valuation in M&A

During mergers and acquisitions in the construction industry, numerous factors can influence valuation outcomes. Among these, Work-in-Progress (WIP) reporting accuracy is a critical (yet sometimes overlooked) element that substantially impacts transaction value.

Construction companies must strike the right balance in their WIP reporting—neither too conservative nor too aggressive. Misrepresentation in either direction can negatively affect valuations. Even companies with solid reporting processes can face valuation challenges if their approach to recognizing revenue and costs doesn't reflect economic reality.

Buyers and investors scrutinize WIP schedules closely during due diligence, looking not just for good processes but for truthful reporting that aligns with project status.

The WIP Challenge

Construction business owners focus on delivering quality projects, managing teams, and building client relationships. When it comes to WIP reporting, companies face specific challenges that stem from the industry's unique operational environment.

Several factors contribute to the development of a "WIP Schedule Gap"—a disparity between the level of detail and accuracy required for effective M&A due diligence and the reporting practices commonly employed in day-to-day operations:

• Companies might rely on outdated systems, where project managers maintain inconsistent tracking methods across different jobs. 
• Others may focus primarily on cash flow, rather than accrual-based metrics that better reflect economic reality.
• Many construction firms still prepare WIP schedules manually, using spreadsheets and extensive data entry, increasing the risk of errors and inconsistencies. This can make it difficult to maintain accurate, real-time reporting that buyers expect to see. 
• These misalignments between operational and financial reporting create vulnerabilities during the M&A process.

Some construction companies may also use specialized processes, based on the preferences of long-term employees and the specific needs of their project portfolio. While customized approaches may function adequately for internal purposes, they might not meet standardized documentation requirements that buyers expect during due diligence. 

This creates a significant gap between how construction companies manage their finances internally and how they need to present them externally during transactions.

How Inaccurate WIP Can Derail M&A Valuations

Buyer Confidence

Sophisticated acquirers view WIP schedules as windows into a company's operational discipline and financial controls. When buyers encounter inconsistent reporting, missing documentation, or unexplained variances, they lose confidence.

With a heightened risk assessment, buyers then adjust their financial models to account for greater uncertainty, reduce projections for future performance, and build in additional contingencies. 

These adjustments directly impact the valuation multiples they are willing to apply, often resulting in offers significantly below initial indications.

Financial Health

WIP reporting directly impacts recognized revenue and profit—the primary drivers of business valuation. When percentage-of-completion calculations contain errors or rely on outdated information, financial statements fail to represent the true economic performance of the construction company.

Hidden cost overruns are particularly concerning for buyers. Projects appearing profitable in summary reports may actually operate at a loss when all costs receive proper attribution. Buyers who uncover such discrepancies during due diligence naturally question the profitability of the entire project portfolio.

Due Diligence

In construction, due diligence focuses intensively on WIP reporting. Acquirers typically engage specialized teams to examine consistency between reported percentages and physical job progress, accuracy of estimated costs to complete, historical precision in project estimation, and patterns of project fade. This scrutiny can include recently completed work to assess estimation reliability.

During the diligence process, financial teams typically perform a hindsight analysis, recasting job-level profitability on a consistent basis using the most recent estimates or final project margins. This gives buyers clarity on how accurately the company has historically recognized revenue and profit. It also reveals patterns of either conservative or aggressive reporting that might affect valuation.

When due diligence teams identify issues, the investigation expands—sometimes dramatically. What might have been a straightforward 60-day process extends into months of additional information requests, site visits, and management interviews. These delays increase transaction costs, strain internal resources, and create opportunities for deal fatigue.

Working Capital

WIP constitutes a substantial component of working capital through over/under-billings. During transactions, buyers and sellers negotiate target working capital levels, with the final purchase price typically adjusted based on closing balances. Inaccurate WIP schedules frequently lead to unfavorable working capital adjustments during closing.

Construction company owners often find themselves facing unexpected financial obligations after closing when working capital calculations reveal under-billings not properly reflected in WIP schedules. These post-closing adjustments can significantly reduce net proceeds from the transaction, creating frustration after the owner believes the deal is complete.

Backlog Value

Beyond completed and in-progress work, buyers assess the value of contracted but unexecuted projects. This backlog represents future earning potential and factors significantly into valuation models. Buyers assign substantial value to the quality backlog, but only when they can accurately assess its profitability.

Deficient WIP reporting undermines confidence in backlog valuation by raising questions about the company's ability to estimate costs accurately and deliver consistent margins. When buyers cannot verify the projected profitability of upcoming work, they discount its value substantially in their models—sometimes assigning minimal value to what should be a significant valuation component.

Improving WIP Reporting and Maximizing Valuation

If you are a construction company owner interested in pursuing a potential merger or acquisition, use these tactics to refine your WIP reporting for greater valuation potential:

• Retain accurate, timely data: Reliable WIP reporting depends on consistent, timely information from project sites to accounting systems. Establishing regular reporting cycles with clear responsibilities ensures data integrity throughout the process. Project managers must provide accurate progress assessments, cost updates must flow promptly into financial systems, and accounting teams must reconcile field reports with financial records regularly.
• Establish ongoing WIP audits and analyses: Monthly executive reviews should examine projects showing unusual patterns, comparing estimated versus actual costs and investigating significant variances. This ongoing analysis not only improves financial reporting but also enhances operational performance by highlighting potential issues before they impact project outcomes.
• Document everything: Documentation of these reviews provides powerful evidence during due diligence that the company maintains strong financial controls. Buyers gain confidence when they can see a history of management attention to WIP reporting and corresponding actions taken to address identified issues. This confidence translates directly into more favorable valuation outcomes. 
• Collaboration between project management and finance: Accurate WIP reporting relies on the combined insights of both project and financial teams. While each function views project performance through a different lens, regular communication—particularly through monthly project review meetings—ensures a shared understanding of progress, costs, and potential risks. This collaboration leads to more timely, informed estimates and strengthens the overall reliability of WIP data.

Engage Specialized Professional Support

Accurate WIP reporting and construction company valuation directly impact transaction outcomes. Construction company owners who address this "WIP Schedule Gap" position themselves to capture maximum value from their years of business building. This preparation represents one of the highest-return investments owners can make before entering the M&A market.

Forward-thinking construction company owners recognize that the path to maximum valuation begins long before entering formal M&A discussions. By establishing proper WIP reporting processes today, they create the foundation for successful ownership transition and full value realization tomorrow.

Redpath and Company’s dedicated construction team combines deep industry knowledge with transaction advisory experience to help companies maximize value through proper financial reporting. Contact us today to discuss how we can help prepare your construction company for a successful transaction.