By Daniel Jahn, CPA — Contractor’s Ledger
Client details have been anonymized. Revenue figures and timelines are approximate.
The Contractor: $5M annual revenue HVAC and mechanical contractor, 18 employees, mix of residential replacement and commercial mechanical work in the Midwest.
The Challenge: Bond line stuck at $750K despite growing commercial backlog. Surety agent kept requesting a WIP schedule the contractor couldn’t produce. Cash flow was unpredictable despite solid revenue.
The Outcome: Bond line increased to $1.05M within 90 days of engagement. First WIP schedule produced within 30 days. Monthly close cycle shortened from 45+ days to 8 days.
The Situation
This HVAC contractor had been in business for 11 years and built a solid reputation in their market. Their residential replacement business was profitable and well-run. They’d recently started landing larger commercial mechanical contracts — school retrofits, light industrial HVAC, and one public works job — and had the crews and experience to handle them.
But their bonding capacity wasn’t keeping up. Their surety had kept them at a $750K bond line for three years, and every time they applied for an increase, the response was the same: they needed a current WIP schedule and financial statements prepared on a percentage-of-completion basis.
Their bookkeeper — a general practitioner who handled several clients in different industries — didn’t know what a WIP schedule was. Their financial statements were cash-basis. Their monthly close was often six weeks late.
They came to us after their surety agent explicitly told them: “Get a construction accounting firm. What you have now won’t support a bond line increase.”
What We Found
In the initial free financial review, we identified several specific problems:
No WIP schedule. Three open commercial contracts with a combined value of $1.4M had no WIP schedule. The surety had no way to evaluate the quality of that backlog or the company’s overbilling/underbilling position.
Cash-basis financials. Their P&L swung wildly month to month based on billing timing. A month with heavy invoicing looked profitable. A month with high project costs and light billing looked like a loss. Neither picture was accurate.
Deferred revenue not recognized. They had 340 active maintenance agreements generating $1,800 each annually — totaling $612,000 per year in recurring revenue. That entire amount was being recorded when collected, not spread over the service period. January looked like a windfall. The rest of the year looked thin.
Job costing gaps. Costs were being allocated to a single “COGS” account rather than tracked by job. The owner couldn’t tell whether his residential replacement work or his commercial mechanical work was more profitable. (We’d find out later — it was a meaningful difference.)
Slow monthly close. The bookkeeper closed the books roughly 5–6 weeks after each month end. By the time statements were ready, they reflected reality two months ago.
The 90-Day Plan
We structured the engagement in three phases:
Phase 1: Immediate (Days 1–30)
Goal: Produce a WIP schedule for the surety.
We worked with the owner to document the three open commercial contracts: contract value, percentage complete based on current cost estimates, costs incurred to date, and billed-to-date position.
Within 30 days, we had their first WIP schedule prepared in a format the surety underwriter could use. The schedule showed:
- Combined backlog of $1.4M across three contracts
- One contract slightly overbilled (normal front-loading on a public works job)
- Two contracts modestly underbilled, representing earned but uninvoiced revenue
- Estimated profit on open work in the 18–22% range
We submitted the WIP schedule and an interim balance sheet (recast on a percentage-of-completion basis) to the bonding agent.
Phase 2: Foundation (Days 30–60)
Goal: Restructure the accounting for accuracy.
We rebuilt the chart of accounts for construction:
- Separated revenue by type (residential, commercial, maintenance)
- Set up job cost tracking by project with proper cost categories (labor, materials, subs, equipment)
- Implemented deferred revenue tracking for maintenance agreements
- Set up percentage-of-completion accounting for the open commercial contracts
We also ran the close cycle for the prior two months. The first properly structured monthly close took about 12 days. The second took 8.
Phase 3: Reporting (Days 60–90)
Goal: Deliver the financial package the surety needed.
With two months of properly prepared financial statements and an updated WIP schedule, we submitted the full bonding package:
- Two months of percentage-of-completion financial statements showing consistent profitability
- A WIP schedule with all three commercial contracts in a clean overbilling/underbilling position
- A balance sheet showing stronger working capital than the prior cash-basis version (because the underbilling — earned but uninvoiced revenue — was now properly shown as a current asset)
- A brief management letter explaining the accounting changes and what they revealed about the business
The surety increased the bond line to $1.05M — a 40% increase — effective immediately.
What the Owner Said
“My bonding agent had been telling me for two years that I needed to fix my accounting. I kept putting it off because I didn’t think it would make that much difference. It made a huge difference — not just for the bond line, but for how I actually run the business. Now I know which jobs are making money.”
The Ongoing Engagement
Following the 90-day project, this client moved to our monthly accounting service. Their books close by the 8th of each month. They receive a job cost report, a WIP schedule update, and a management summary every month.
Within six months of the engagement, the owner identified — for the first time — that his residential replacement work was generating 24% gross margin while his commercial mechanical work was averaging 16%. He adjusted his pricing and sales strategy on commercial work accordingly.
Two years later, their bond line has grown to $1.8M.
Is This Your Situation?
If your bonding agent has been asking for documents you can’t produce, or your financial statements don’t reflect how your business actually performs, we can help.
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