A contracting business rarely finishes a job on the same day its financial statements are dated. Work in progress is where the accounting choices behind partly finished contracts live, and getting it wrong is one of the more specific ways a buyer can overpay for a services business.
Key takeaways
For a contracting business, revenue on a long contract is typically recognized as work is performed rather than only when the whole job is complete. That means two separate figures exist for every open contract at any balance-sheet date: costs incurred to date, and the amount actually billed to date. When billings run ahead of the recognized revenue for the work actually done, the difference is a liability — money collected for work not yet performed, owed back to the customer in substance. When costs and recognized revenue run ahead of billings, the difference is an asset — work that has genuinely been earned but has not yet been invoiced. Neither figure is visible in a simple revenue or cost number; both only show up once the WIP schedule is actually read job by job.
For an Ontario contracting business specifically, a statutory holdback sits on top of the billing-versus-cost picture. A treadstonelaw.ca explainer is direct about the figure: “that figure sits at 10 percent under the Construction Act, R.S.O. 1990, c. C.30, as amended”, applied to “the value of work done and materials supplied” — the same source cautions readers to “verify the current percentage immediately with a lawyer,” which is worth carrying into diligence as its own reminder that this is a moving target, not a fixed constant. Release generally follows once the applicable lien period has expired, no liens have been registered, and there are no outstanding disputes or set-offs. For a contracting business being bought — as opposed to an owner hiring a contractor — that 10% is money the business has already earned on billed work but cannot yet collect, and it is easy to leave sitting inside a generic accounts-receivable figure without anyone flagging how long it will actually take to convert to cash.
There is a specific federal rule that intersects with the holdback and is worth knowing before assuming the tax treatment simply follows the cash. Subsection 168(7) of the Excise Tax Act addresses amounts retained under a construction, renovation or repair contract, or under a provincial statute governing that retention: tax on the retained portion “is payable on the earlier of the day that part is paid and the day it becomes payable” — not simply on the day it is actually paid. Depending on how the underlying contract and the applicable provincial lien legislation define when the holdback becomes payable, this can mean the corporation owes GST/HST on holdback revenue before it has actually collected the cash to remit it. This is a genuine cash-timing gap, and it is exactly the kind of thing worth flagging for cash management immediately after closing rather than discovering it when a remittance deadline arrives.
Rising WIP without a matching increase in completed, billed revenue is the services-and-contracting equivalent of the inventory red flag deavo.ai names in its own financial-statement guidance: “rising inventory levels without a matching increase in sales” is listed as a pattern worth investigating, and the same logic applies to a growing WIP balance that is not converting into completed, collected jobs. Two things are worth testing job by job: whether the percentage-of-completion method was applied consistently across the periods under review, and whether estimated costs to complete were revised sharply on any specific job — a large, late revision to a cost-to-complete estimate is often the first visible sign that a job was mispriced or poorly managed. A deavo.ai due-diligence checklist for first-time buyers also flags “outstanding loans, leases or liens against assets” as a standard financial-DD item — on a contracting business, liens registered against a customer’s property in connection with the target’s own unpaid invoices are the direct evidence of a collection problem sitting inside WIP.
A contracting business’s job-level margin and its WIP valuation are drawing on the same underlying job-costing records, and testing one without the other misses how they interact. A job that looks profitable on a percentage-of-completion basis can still be carrying an optimistic cost-to-complete estimate that has not yet been corrected, which means the margin shown for that job is provisional in a way a completed sale never is. Read this alongside testing gross margin by product or service line, applying the same job-by-job consistency check to both the margin and the WIP figures for the same open contracts, rather than treating them as two separate exercises against two separate schedules.
Take a $500,000 Ontario contract where the contracting business has incurred $300,000 of cost to date and billed $280,000 — illustrative figures set here only to walk through the mechanics. On a straight percentage-of-completion read, $20,000 of work is underbilled and sits as an asset. Separately, the Ontario statutory holdback applies to the billed amount: 10% of $280,000, or $28,000, is not collectible until the lien period passes with no liens registered and no disputes outstanding. Together, roughly $48,000 connected to this one contract is real, earned value that will not convert to cash on the business’s ordinary collection cycle — exactly the kind of figure that belongs in a cash forecast for the weeks after closing, not just in the valuation.
No, not automatically. Holdback percentages and release mechanics are set by each province’s own construction or builders’ lien legislation and are not uniform across Canada — confirm the applicable province’s Act rather than assuming the Ontario figure travels.
Not necessarily. It can reflect genuinely earned work waiting on a routine billing cycle, or it can reflect a job the contractor is behind on invoicing because of a dispute with the customer — the same figure, with a very different meaning, which is why it is worth asking job by job rather than reading the total on its own.
It is typically addressed directly in how the completion accounts or closing balance sheet value uncompleted contracts, which is covered in a sibling piece on preparing the closing balance sheet.
A short call is enough to walk through how a contracting target’s WIP and holdback position should feed into price and cash planning.
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