Buying a Contractor: Who Funds the Unfinished Jobs?

The seller shows you a profitable contractor with a full project backlog. After closing, your crews spend weeks finishing those jobs. Payroll, materials and subcontractor bills keep arriving. The customer says: "We already paid."

That is the acquisition question I would put beside the earnings model: How much cash will we need to finish the work we inherit, and where does that cash come from?

A backlog report cannot answer it. Neither can last year's profit.

For each inherited job, compare the cash the buyer can actually collect with the unpaid commitments and remaining delivery costs the buyer must fund. Then put those payments and collections on a calendar. A job can have a modest final shortfall and still require a much larger cash injection before the last payment arrives.

The seller's revenue is not the buyer's funding

Three things are easy to blend together at closing:

• Revenue recognized: what the accounting records say was earned. It is not a bank balance.
• Cash collected: what the customer has paid. You still need to establish whether that cash stays in the business or leaves with the seller.
• Work remaining: the labor, materials, subcontractors and closeout work someone still has to pay for.

The seller may have collected a deposit before earning the revenue. Or the seller may have earned revenue but not collected it, leaving a receivable that transfers to the buyer. Or a genuinely profitable job may have enough collectible cash left to fund completion.

Those are different situations. "The prior owner already booked the revenue" is not enough to determine the buyer's cash need.

An accounting liability for advance billings also is not necessarily the same amount as the cash needed to finish. EisnerAmper's construction accounting explanation distinguishes contract assets and contract liabilities from receivables. The accounting presentation helps explain timing; the job records and deal terms determine the funding question.

A profitable job can leave the buyer short of cash

Consider a fictional project at closing. These are illustrative inputs, not a client result or industry benchmark.

The full project still has an illustrative $30,000 profit: $200,000 of revenue less $170,000 of total cost.

But the buyer's remaining work produces $40,000 of future collections against $60,000 of future payments. That is a $20,000 completion funding shortfall before considering any negotiated price adjustment or financing.

Now add timing. Suppose the buyer pays $30,000 in week one and $30,000 in week four, then collects the entire $40,000 in week eight. The buyer must fund a $60,000 peak cash need, even though the eventual shortfall is $20,000.

A $20,000 purchase-price reduction can help the economics if it leaves usable cash with the buyer. It does not automatically supply the other $40,000 needed before collection. A seller escrow that is unavailable for payroll is not an operating bank balance either.

The question is not just "Did we pay the right price?" It is "Can we fund the inherited work on the dates we must pay for it?"

Build a closing-to-cash schedule, not just a backlog list

I would start with one row per inherited job, then a weekly cash schedule beneath it. The general WIP schedule remains useful for measuring project progress. This schedule answers a different buyer decision: what must we finance after ownership changes?

Record these items:

1. Approved scope and remaining work. Use the executed contract and approved changes, then confirm the physical work left with the project manager. A request for extra work is not an approved collection right.
2. Closing billings and actual collections. Tie invoice balances to customer receipts. Identify deposits, credits, disputes and retainage separately.
3. Collection ownership and dates. Name who owns each receivable, who sends the invoice, which account receives payment, and what must happen before retainage is released.
4. Unpaid pre-close commitments. Identify vendor bills, earned commissions, payroll accruals and other amounts the buyer actually assumes. Record the contractual payment trigger and payer.
5. Remaining cost to finish. Include loaded labor, materials, subcontractors, testing, commissioning, punch-list work and closeout. Add separately identified warranty or rework exposure where the buyer assumes it.
6. Opening funding and the settlement mechanism. Identify transferred usable cash, any working-capital adjustment, separately negotiated reserve and available financing. Name when each becomes accessible.

Avoid the easiest double counts. If retainage is already in open receivables, do not add it again. If an unpaid material bill is already included in the completion payment estimate, do not add it again as a second obligation. Materials already paid for and transferred may reduce future purchases; verify their availability before counting that benefit.

For a bounded inherited-job pool:

Completion funding shortfall = assumed unpaid commitments plus remaining delivery payments, less collectible buyer-owned customer cash and usable cash assigned to that work.

Include each amount once. Count only collections the buyer owns and reasonably expects to receive. Discount disputed or doubtful amounts in a separate downside case; do not count the full remaining contract as collectible cash. If the result is negative, the pool has an expected cash surplus, not a funding shortfall. Separately calculate the largest cumulative cash deficit on the payment calendar. That peak is the timing requirement.

This is not the whole-company cash forecast. Overlay rent, office payroll, debt service and new-job spending in the 13-week cash forecast. Do not assume new customer deposits are spare cash: those customers have their own work to fund.

Long-tail jobs consume capacity as well as cash

The inherited workload may look nearly finished on a revenue report while still requiring scarce technician time.

Commissioning, callbacks, site access delays, customer acceptance and documentation can keep a job open after most billing has occurred. Track remaining hours, responsible crew, release conditions and the next concrete closeout action. A project labeled "95% complete" is not a reliable labor plan unless someone has estimated what remains.

Keep completion work separate from a warranty reserve and from a new scope request. They have different collection rights and costs. Also separate imported project history from work performed after closing. A software migration date is not the original service date, and a cumulative cost load is not automatically this month's expense.

The acquisition model needs a capacity plan alongside its cash plan. Otherwise the same crew hours may be promised to both legacy closeout and the new growth forecast.

Negotiate the obligation once, then fund it explicitly

Customer deposits and advance collections deserve explicit purchase-agreement treatment. Prairie Capital Advisors' explanation of working-capital adjustments describes the problem when a seller retains advance cash and a buyer inherits delivery obligations. It discusses debt-like treatment or a cash reserve as possible responses.

There is no universal rule that every deposit must be deducted from price at face value. Your deal team needs to agree on the working-capital definition, the completion economics, any debt-like items, reserves and the closing funds flow. An asset purchase and an equity purchase can also leave the buyer with different contractual responsibilities. Counsel should confirm assumed obligations and any required consents.

Most importantly, reconcile the mechanisms. Do not charge the same assumed bill through a working-capital shortfall, a separate debt-like deduction and another completion reserve without explaining how the adjustments interact. And do not turn a one-time liability into a recurring earnings reduction merely by applying an EBITDA multiple.

The public Edgar Galindo acquisition interview makes the ambiguity concrete: the buyer describes a dispute involving WIP and unpaid commissions. That is his account, not an adjudicated finding or proof of what caused the businesses to fail. The practical lesson is to settle the commission trigger, amount and payer from the plan and agreement, rather than assume a WIP label settles them.

For the wider earnings and valuation question, use how buyers evaluate contractor financials. Keep that analysis separate from the cash required to fulfill inherited contracts.

Questions to answer before signing

Does a profitable backlog mean we inherit enough cash to finish it?

No. Project profit measures the whole job. The buyer needs the remaining collectible cash, remaining payments and usable opening funding, with their dates. The fictional project above earns $30,000 over its life but leaves a $20,000 completion shortfall and a $60,000 peak cash need under the stated deal terms.

Should customer deposits be treated as debt-like items?

Possibly, but not automatically. The purchase agreement needs a consistent treatment across working capital, assumed obligations, reserves and price adjustments. The recorded deposit balance, estimated delivery cost and actual funding need can differ.

What if we already bought the business?

Separate inherited jobs from new work. Rebuild each job's remaining collections and payments from current records, trace the agreed closing treatment, and prioritize the jobs with the largest timing gaps or scarce crew-hour requirements. Have the deal team assess any contractual recovery rights; the operating plan cannot wait for a dispute to finish.

What should I ask the seller for first?

Ask for the job-level bridge from approved contract value to billings, collections, unpaid commitments and remaining cost. Then ask: Which inherited jobs require us to pay before we can collect, and what funds those payments?

If that bridge cannot be produced, ask Level to assess your inherited-job funding gap. Start with the opening job list and the reports you do have. We can help connect the project records to the cash plan so your team knows what to finish, what to collect and what it must fund.

Source and claim note

This article combines public accounting and transaction guidance with an original operating framework. All scenario amounts and payment dates are fictional. No private customer figures, contracts or outcomes are disclosed. The buyer interview is attributed testimony, not independent verification of a disputed liability. Actual recognition, legal responsibility and closing adjustments depend on the underlying records and deal terms.