Contractor WIP Schedule & Over/Under-Billing in a Business Sale
In a Texas HVAC, electrical, plumbing, roofing, or specialty construction business sale, buyers and Quality of Earnings (QoE) accountants test open jobs using an accrual Work-in-Progress (WIP) schedule under percentage-of-completion accounting (ASC 606 cost-to-cost method). When progress billings or upfront customer deposits exceed earned revenue based on actual costs incurred, the resulting Over-Billing (Billings in Excess of Costs) is treated as a working-capital liability or debt-like deduction that reduces the seller’s closing check dollar-for-dollar—and can simultaneously cut trailing EBITDA at a 3.5x to 6.0x multiple.
1. Over-Billings vs. Under-Billings: What Happens to EBITDA and Closing Cash
Many profitable Texas contractors manage from bank balances and invoice totals, booking 50% upfront equipment deposits or front-loaded AIA G702/G703 mobilization draws directly into QuickBooks revenue. During due diligence, the buyer’s accounting team recalculates earned revenue on every open job as (Actual Cost to Date ÷ Total Estimated Cost at Completion) × Total Contract Value:
Over-Billings (Billings in Excess of Costs / CIEB Liability)
What it is: You have billed the customer (or collected upfront deposits) for more than the percentage of work physically completed to date.
Diligence impact: In a cash-free, debt-free sale, the seller keeps pre-closing bank cash, leaving the buyer to pay the remaining labor and material costs to finish the job. Buyers therefore classify Over-Billings as a Current Liability inside the Net Working Capital (NWC) peg—or as a direct dollar-for-dollar debt-like deduction from the purchase price.
Under-Billings (Costs in Excess of Billings / CIEB Asset)
What it is: You have incurred labor, material, and subcontractor costs on an active job that have not yet been progress-billed to the customer.
Diligence impact: While Under-Billings appear as a Current Asset on an accrual balance sheet, QoE teams aggressively audit them for "margin fade" and unapproved change orders. If a job is 85% through its cost budget but only 60% physically complete, QoE writes off the under-billing as an unbillable cost overrun rather than counting it as good working capital.
2. Worked Example: 4-Job WIP Audit in an $8.5M Texas Electrical / Mechanical Sale
Examine how a buyer’s QoE team audits four active commercial jobs at a Texas electrical or mechanical contractor, and why $175,000 of net over-billings plus an unapproved change order reduce closing proceeds:
| Active Project | Contract Value (Approved) | Est. Total Job Cost | Actual Cost to Date | % Complete (Cost-to-Cost) | Earned Revenue (ASC 606) | Billed to Date (Invoiced) | Over / (Under) Billing | Buyer QoE Treatment at Close |
|---|---|---|---|---|---|---|---|---|
| Job 104: DFW Cold-Storage Switchgear | $1,200,000 | $840,000 | $420,000 | 50.0% | $600,000 | $780,000 | +$180,000 Over-Billed | Front-loaded equipment draw treated as a -$180,000 NWC Liability. |
| Job 108: Houston Medical TI Retrofit | $650,000 | $455,000 | $364,000 | 80.0% | $520,000 | $450,000 | ($70,000) Under-Billed | Verified against signed GC pay-app schedule; counted as +$70,000 NWC Asset. |
| Job 112: Austin Industrial Controls | $500,000 | $350,000 | $140,000 | 40.0% | $200,000 | $315,000 | +$115,000 Over-Billed | 50% upfront mobilization deposit reclassified out of EBITDA into -$115,000 Liability. |
| Job 115: San Antonio Retail Rough-In | $400,000 | $300,000 | $285,000 | 95.0% | $380,000 | $330,000 | ($50,000) Claimed Under-Billed | Disallowed ($0 Asset): $50K was verbal extra work with no signed GC change order. |
| Total Open WIP Portfolio | $2,750,000 | $1,945,000 | $1,209,000 | 62.2% Avg | $1,700,000 | $1,875,000 | +$175,000 Net Over-Billed | -$225,000 Net Working Capital Impact ($295K over-billed less $70K verified under-billed). |
See the exact foreman change-order gate in our 24-page Electrical Sample: In Job 115 above, $50,000 of field labor vanished in diligence because the foreman pulled extra wire on a GC superintendent’s verbal promise. Flip through our 24-page Electrical & Specialty Contracting ($8.5M) Field Guide sample to see the one-page foreman authorization gate and job-cost closeout checklist we install in Texas trade shops.
3. Four Texas-Specific WIP, Retainage & Job-Cost Rules to Settle Before an LOI
1. 10% Statutory Retainage (Texas Property Code Ch. 53)
Under Texas Property Code Chapter 53 (§53.101), private commercial property owners and general contractors withhold 10% statutory retainage until 30 days after final completion. Because commercial jobs often span 6 to 14 months, retainage receivables routinely age past 90 or 120 days. Explicitly stipulate in your Letter of Intent (LOI) that uncontested contractual retainage counts 100% toward closing Net Working Capital.
2. Stored Materials & Switchgear Deposits
When a Texas electrical, HVAC, or plumbing contractor orders long-lead chillers, generators, or switchgear, installing a policy to bill for "stored materials on site or in bonded warehouse" with supplier title transfers prevents massive cash-to-accrual swings between vendor AP and customer progress billings.
3. Warranty Reserve & Callback Accruals
In Texas commercial roofing, plumbing, and HVAC sales, buyers inspect 24-month callback logs and require an accrued warranty liability on the closing balance sheet. Tracking warranty callbacks in a dedicated job-cost code proves your actual historical warranty cost is 0.5%–1.2% of revenue rather than an arbitrary 3% buyer reserve.
4. Loaded Labor Rates & True Gross Margin by Crew
If your QuickBooks places field payroll taxes, workers’ comp, truck fuel, and small tools down in general overhead instead of Cost of Goods Sold, your job-level WIP schedule will overstate gross margin. Use our free Contractor’s Loaded-Labor Quoting Guide to align bid rates with true job-cost reality.
Questions Texas Contractors Ask About WIP & Over/Under-Billing
What is over-billing (Billings in Excess of Costs) in a contractor business sale?
Over-billing occurs when a contractor’s progress billings or upfront customer deposits on an open project exceed the revenue earned based on percentage of completion (cost-to-cost under ASC 606). Because the seller collected the cash before performing the work, buyers treat net over-billings as a current working-capital liability or a dollar-for-dollar debt-like deduction at closing.
Do buyers always give full credit for under-billings (Costs in Excess of Billings)?
No. While under-billings are recorded as a current asset on an accrual balance sheet, Quality of Earnings (QoE) accountants scrutinize whether the unbilled costs are actually recoverable from the customer or whether they represent unapproved field change orders, estimating errors, or job-cost overruns (margin fade) that must be written off.
How is 10% Texas construction retainage treated in Net Working Capital at closing?
Under Texas Property Code Chapter 53, commercial property owners and general contractors commonly withhold 10% statutory retainage until 30 days after project completion. Unless your LOI explicitly includes collectible retainage inside Transaction Net Working Capital, a buyer’s QoE team may exclude retainage aged past 90 days from good Accounts Receivable.
How do unapproved field change orders hurt a contractor in due diligence?
If your foremen perform extra work on a verbal handshake without a signed change order, the labor and material costs hit your P&L immediately, but QoE accountants under ASC 606 will refuse to recognize the unbilled revenue until written customer approval exists—reducing both trailing EBITDA and closing working capital.
What if my Texas HVAC, electrical, or plumbing shop keeps cash-basis books without a WIP schedule?
If you do not maintain a monthly job-by-job WIP schedule, the buyer’s transaction advisory CPA firm will reconstruct one during diligence using your job folders, supplier invoices, and progress billings. Buyer-reconstructed WIP schedules almost always resolve ambiguities in the buyer’s favor.
How does SweetSpot help Texas contractors clean up job costing and WIP before a sale?
SweetSpot is an operator-led advisory firm, not a CPA firm or commission broker. We work with Texas commercial and specialty contractors for fixed, published fees ($250 Field Guide, $2,500 Business System Inspection, and $4,750/day on-site diagnostics) to install foreman change-order gates, job-cost tracking, and clean WIP cut-offs before you go to market.