Righting an Upside-Down Balance Sheet at a High-End Plumbing Contractor

The Situation

The company was a large, well-regarded plumbing contractor with two lines of business: contract work for high-end residential general contractors and custom home builders, and a service and repair operation for homeowners billed on a time-and-materials basis. Revenue was strong, backlog was healthy, and from the outside it looked like a business ready to sell.

The owners thought so too, and told their M&A attorney they wanted to go to market. The attorney, who had seen enough contractor transactions to know what a buyer’s diligence team does with a WIP schedule, recognized that the accounting and reporting infrastructure was not where it needed to be and referred the company to Buxbaum before a process began.

What we found once inside was more serious than a reporting gap. The balance sheet was upside down.

The Challenge

Accounts payable and customer deposits on the liability side far exceeded receivables, retainage receivable, work in process, and inventory on the asset side. Billings in excess of costs on active jobs were being treated as cash to run the business rather than as an obligation to complete the work. Put plainly, the company had been financing itself by holding customer deposits and stretching vendor and supplier terms well beyond normal, and the cash on hand belonged, economically, to builders and vendors rather than to the company.

That position was not the result of a bad quarter. It was the accumulated effect of contractor accounting and operating disciplines that had never been built:

• No WIP schedule, so there was no view of estimated cost to complete, percent complete, or over and under billings by job
• Pay applications submitted late and inconsistently, with completed work sitting unbilled for weeks and progress billings lagging the work in the field
• Change orders performed on verbal approval but never documented, priced, or billed, so extra work was absorbed into the original contract margin
• Retainage receivable owed to the company on completed jobs but never tracked or pursued
• No collections process beyond waiting for builders to pay, and no use of preliminary notices or lien rights to protect receivables
• Accounts payable and subcontractor billing managed by deferral rather than by plan, with pay-when-paid terms applied inconsistently
• No cash flow forecast, so cash tightness appeared as a surprise each month
• Financial statements with no job-level detail, so nobody could say which projects made money and which lost it
• No margin analysis by job, by builder, or between the contract and service lines, and no way to see gross profit fade as jobs progressed

The owners had built a successful business on the quality of their work and their relationships with builders. They had never had the information to know whether the work was profitable, which builders paid on time, or which jobs were bleeding margin between estimate and completion. A buyer’s diligence team would have found all of it in the first week, and without a WIP schedule to review, would have had no basis to get comfortable with the earnings at all.

What We Did

Buxbaum placed a fractional controller into the company with a mandate that went beyond the books: rebuild the processes that connect the field to the ledger, so that job cost reflects the work and the work is managed with job cost in view.

Job cost and WIP reporting. We built job costing from the ground up, capturing labor, material, subcontractor, and equipment cost by job, and established a monthly WIP schedule with contract value, approved change orders, estimated cost to complete, percent complete, revenue earned, billings to date, and the resulting over or under billing for every active job. For the first time, the owners could see which jobs were on track, which were fading, and how much of their cash was actually earned.

Pay applications and change orders. We established a progress billing cadence tied to the WIP schedule so pay applications go out on time and reflect work actually performed. Change order documentation and pricing moved into the field workflow, so extra work is written up, approved, and billed rather than absorbed. On the service side, we tightened time-and-materials billing so that technician hours and parts flow to an invoice the same day.

Retainage and collections. We built a retainage receivable schedule with active follow-up on balances the company was owed on completed and closed-out jobs, many of which had simply never been requested. We instituted a collections process with weekly AR aging review by builder, and established a preliminary notice practice to preserve lien rights on new contract work.

Payables and subcontractor management. We moved accounts payable from reactive deferral to a managed schedule aligned with the cash forecast, applied pay-when-paid terms consistently on subcontractor billing, and began rebuilding supplier relationships on a predictable basis rather than straining them further.

Cash flow forecasting. We implemented a rolling 13-week cash forecast built from the pay application schedule, retainage release dates, collections, subcontractor and supplier payments, and payroll, so the owners see the working capital impact of each new job before they commit to it.

Margin analysis. With job cost and WIP in place, we built margin reporting by job, by builder, and by line of business, including comparison of estimated to actual margin so that gross profit fade is visible while there is still time to address it on the job and to correct it in the next bid.

Systems integration. Much of the dysfunction lived in the gap between field operations and accounting. We automated and upgraded the project management, estimating, field service, and billing workflows and integrated them with the accounting system in both directions, so that a change order entered in the field flows to the pay application, a collection flows to the cash forecast, and job cost is visible without manual reconciliation.

The Result

The engagement is ongoing. With job cost, WIP reporting, and billing discipline in place, the owners now have a turnaround plan grounded in project-level economics: billing what is earned as it is earned, collecting what is billed, recovering retainage, pricing new work to the margin the WIP schedule shows they actually achieve, and unwinding the over-billed position so that customer deposits and vendor terms return to normal levels. Cash is forecast rather than discovered, and the owners can see the path from where the business is to where it needs to be.

The transaction the owners wanted is still the goal. It is now a goal with a realistic timeline, because the company is building the financial history a buyer will need to see: a clean WIP schedule, consistent contract-level margins, a reconciled balance sheet, backlog with supportable gross profit, and a working capital position that reflects a healthy contractor rather than one borrowing from its customers.

Why It Matters

This company was one conversation away from launching a sale process that would have collapsed in diligence. A buyer’s team would have asked for the WIP schedule first, found there was none, and then found the over-billed position, the unbilled change orders, the uncollected retainage, and the absence of job margin within days. The owners would have learned the true state of their business from the people trying to pay the least for it.

Instead, they learned it from their own advisors, with time to fix it. That is the difference an M&A attorney’s referral made, and it is the reason we encourage contractors to have their financial infrastructure assessed before they announce they want to sell, not after.

If you are running a contracting business on strong relationships and thin visibility, and a transaction is somewhere in your future, let’s talk about what a buyer would find in your WIP schedule and how to fix it first.