B
Backlog Quality
The composition and durability of a contractor's contracted future revenue. Buyers do not just look at the headline backlog dollar number; they evaluate signed contract value, expected gross margin, customer concentration, contract structure (lump sum versus cost-plus, public versus private), age of backlog, and the likelihood that backlog will actually convert to revenue. High-quality backlog is recent, signed (not just verbally awarded), diversified across customers, and weighted toward profitable contract structures. Backlog quality is the single most-examined metric in construction M&A diligence.
B
Bonding Capacity
The maximum total dollar value of bonded work a surety will extend to a contractor at any given time, typically expressed as a single project limit and an aggregate program limit. Bonding capacity is a function of the contractor's balance sheet (particularly working capital), historical project performance, management depth, and the surety's view of the construction market. Bonding capacity is a meaningful competitive moat in public works and large private commercial construction, and protecting it through a transaction is critical. See how ESOPs preserve bonding capacity.
S
Surety Credit
A surety company's underwritten willingness to issue bid, performance, and payment bonds on behalf of a contractor. Surety credit is distinct from bank credit: sureties underwrite to a "no loss" standard rather than to expected loss, which makes them far more conservative than commercial lenders. In an M&A or ESOP transaction, the surety must reunderwrite the post-transaction company; involving the surety early prevents this from becoming a closing-day surprise.
B
Bond Types: Bid, Performance, and Payment Bonds
Three core construction bonds. A bid bond guarantees that a contractor will honor its bid if awarded the project. A performance bond guarantees completion of the project according to contract terms. A payment bond guarantees payment to subcontractors and material suppliers. On most public works projects, performance and payment bonds are required at full contract value.
W
Work-in-Progress (WIP) Accounting
Construction-specific accounting that recognizes revenue and cost over the life of a project rather than at completion. The WIP schedule shows each open project's contract value, costs incurred to date, billings to date, estimated cost to complete, and over- or under-billings. A clean WIP schedule is the single most-scrutinized document in construction diligence. Buyers use it to validate revenue recognition, identify underbilled projects (a cash flow risk), and stress-test margin assumptions.
P
Percentage of Completion (POC)
The standard revenue recognition method for long-duration construction contracts. Revenue is recognized in proportion to the percentage of total project cost incurred to date. POC is the GAAP standard for construction contracts of meaningful duration; the alternative (the completed contract method) is used only in narrow circumstances.
C
Completed Contract Method
An alternative revenue recognition method where revenue and cost are deferred until the project is complete. Permitted only in limited circumstances for small contractors or contracts of very short duration. Most middle market contractors use percentage of completion.
R
Retention (Retainage)
A portion of contract billings withheld by the project owner until satisfactory completion, typically 5 to 10 percent of each progress billing. Retention sits on the contractor's balance sheet as a receivable but is not collected until project closeout, sometimes months after substantial completion. In M&A diligence, buyers examine retention aging closely as an indicator of working capital risk and project closeout discipline.
C
Change Orders
Modifications to the scope or price of a construction contract executed after the original contract is signed. Change orders are normal in construction, but their volume and approval status drive both revenue recognition and dispute risk. Buyers look at change order volume relative to base contract value, the percentage of change orders signed versus pending, and the rate at which change orders are profitable relative to base work.
C
Contract Structures: Lump Sum, T&M, Unit Price, Cost-Plus, GMP
Construction contracts come in several structures, each with different risk and margin profiles. Lump sum (also called fixed price) contracts pay a single agreed price regardless of cost; the contractor carries cost risk. Time and materials (T&M) contracts pay hourly labor rates plus material cost markup; the owner carries cost risk. Unit price contracts pay a fixed price per unit of work (e.g., per cubic yard of concrete); quantity risk is shared. Cost-plus contracts pay actual cost plus a fee; the owner carries nearly all cost risk. Guaranteed Maximum Price (GMP) is a hybrid (see below). Buyers value the contract structure mix because it directly affects margin volatility.
G
Guaranteed Maximum Price (GMP)
A contract structure in which the contractor agrees not to exceed a ceiling price. Savings below the ceiling are typically shared with the owner under an agreed split. GMP contracts are common in construction management at-risk delivery and combine some of the upside of cost-plus with a hard ceiling that protects the owner.
P
Prevailing Wage / Davis-Bacon Act
Wage rate requirements applied to publicly funded construction projects. The federal Davis-Bacon Act and state-level "little Davis-Bacon" laws require contractors on public projects to pay workers no less than the prevailing local wage and benefit rate for each trade. Prevailing wage exposure is neutral to positive in buyer underwriting because it correlates with predictable revenue, but compliance with certified payroll requirements is a hard diligence item.
C
Certified Payroll
Weekly payroll reporting required on most prevailing wage projects, certifying that workers were paid the required wage rates. Certified payroll is a serious compliance exposure: violations can result in withholding of contract funds, project debarment, and back wage liability. Buyers evaluate certified payroll compliance history closely in any business with meaningful public works revenue.
O
OCIP / CCIP
Wrap-up insurance programs that consolidate insurance coverage across all parties on a large project. Owner Controlled Insurance Programs (OCIPs) are sponsored by the project owner. Contractor Controlled Insurance Programs (CCIPs) are sponsored by the general contractor. Both replace the need for individual subcontractor insurance on the covered project and can change how insurance cost is built into bids.
P
Prequalification
The status of being approved by a public agency, owner, or general contractor to bid on their projects. Public agency prequalifications (state DOTs, federal agencies, large municipalities) are slow to obtain, require strong safety and performance histories, and represent a competitive moat. Buyers in public works pay premium multiples for businesses with strong prequalification status across multiple agencies. See our infrastructure M&A practice.
E
EBITDA Add-Backs in Construction
Adjustments to reported EBITDA that normalize the earnings of a construction business for sale presentation purposes. Common construction add-backs include owner compensation in excess of fair market, non-recurring project losses, discontinued lines of business, one-time legal settlements, non-cash items, owner-related expenses (vehicles, insurance, travel), and project closeout adjustments. Buyers scrutinize add-backs in construction more closely than in most other industries because construction earnings can be volatile and add-back lists can grow long.
O
Owner's Working Capital
The working capital position the owner is expected to deliver to the buyer at closing. In construction M&A, working capital includes accounts receivable (including retention), under-billings, less accounts payable and over-billings. The working capital peg is typically set at a normalized average (often a trailing twelve-month average). Setting the right peg is one of the most economically meaningful negotiations in a construction transaction; a poorly set peg can transfer millions in value at closing.
M
Mechanic's Lien
A statutory claim against real property to secure payment for labor or materials furnished in improving that property. Mechanic's lien rights are a primary collection tool for contractors and subcontractors on unpaid work. Buyers in diligence examine the contractor's lien history (filed liens, lien waivers, and bonded liens) as an indicator of customer payment quality and dispute frequency.
J
Joint Check Agreement
An agreement under which payment is made by a single check payable jointly to two or more parties in the construction payment chain (most commonly a general contractor and a key subcontractor or supplier). Joint check agreements protect upstream payers from double-payment risk when a subcontractor is in financial distress or has lien exposure.
E
ENR Ranking
Annual rankings published by Engineering News-Record (ENR), the trade publication for the construction industry. ENR's Top Contractors, Top Specialty Contractors, and Top Design Firms lists are widely cited reference points in construction M&A. Buyers use ENR rankings as a quick filter for scale and reputation, though rankings are by revenue only and do not capture profitability or asset quality.