Valuing a Construction Company in a Separation

A construction company can report strong earnings while an unfinished project is heading over budget. It can also have a healthy bank balance because customers have paid ahead of work that still needs to be completed. In a separation, both spouses need to understand the jobs behind the financial statements before relying on a business value.

The valuation should explain the profit the company can sustain and the cash required to deliver its commitments. Annual revenue, equipment values and the size of the order book each provide part of that evidence, but none answers the question alone.

Identify the business interest and relevant date

A general contractor, an excavation business and an electrical contractor can have very different assets and risks. Establish what the company does, who owns it and whether related entities hold equipment or real estate. Shareholder loans and agreements between those entities need consistent treatment.

Counsel should confirm the valuation date under section 16 of Manitoba’s Family Property Act and whether an earlier valuation is required. Job schedules and financial records need to address that date, which may fall in the middle of a major project. Later project results require careful assessment of what they reveal about conditions existing at the valuation date. [1]

Examine unfinished work job by job

A work-in-progress schedule should connect each significant contract to its agreed price, costs incurred, estimated remaining costs and billings. CBIZ’s valuation guidance explains how these schedules inform both the assessment of current performance and forecasts. Their usefulness depends on the reliability of the underlying estimates. [2]

An invoice measures what has been billed under the contract. It does not, by itself, establish how much profit has been earned or whether the remaining work is profitable. The valuator needs to understand the company’s accounting policies and reconcile the job schedules to the financial statements.

The remaining-cost estimate deserves scrutiny. Unreceived supplier invoices, committed subcontract costs and corrective work may materially affect the forecast. Comparing earlier estimates with final results on completed jobs can help assess whether management has consistently underestimated completion costs.

The same project adjustment can affect more than one part of the calculation. A revised completion estimate may change reported earnings and the balance sheet, as well as the forecast. The report should reconcile those effects so a cost overrun is neither omitted nor deducted twice.

Disputed change orders require separate attention. Additional work performed does not establish that the customer has accepted the price or that the amount will be collected. Correspondence and contract terms help counsel address entitlement while the valuator assesses the financial consequences under the appropriate instructions.

Separate contracted work from prospective work

Backlog can support a forecast, but its face amount is future revenue rather than profit available to the shareholder. CBIZ’s guidance examines backlog in relation to forecast revenue and cautions that signed contracts do not guarantee profitable cash flow. Expected margins and delivery requirements still need examination. [2]

Distinguish awarded contracts from bids, letters of intent and informal expectations of repeat work. A bid pipeline may inform future prospects, provided its probability and timing are explained. Treating every opportunity as a firm contract overstates the certainty of the forecast.

Customer concentration also matters. A company dependent on one developer or general contractor needs an assessment of that relationship and the terms governing continuation. A large backlog can increase exposure if the business lacks the people or financing needed to complete it.

Reconcile receivables and cash with obligations

Receivables should distinguish ordinary progress billings, holdbacks and disputed amounts. Review aging, subsequent receipts and the reasons for non-payment. A longstanding balance may reflect an unresolved deficiency or claim rather than routine administrative delay.

Manitoba’s Builders’ Liens Act contains holdback requirements and statutory trust provisions affecting construction funds. Those rules matter when assessing collection timing and cash that may be available for distribution. Counsel should identify their application to the contracts and funds in the particular file. [3]

Manitoba also has prompt-payment and interim adjudication provisions, supported by its current prompt-payment regulation. Their existence does not establish that a disputed receivable will be paid in full. Notices of non-payment, adjudication materials and settlement correspondence may be relevant to assessing the balance. [3, 6]

Customer deposits and advance billings need to be reconciled with the cost of completing the related work. Payables and holdbacks owing to subcontractors also belong in that analysis. A bank balance should not be treated as surplus simply because the money has arrived before the bills.

Assess the people and financial capacity behind delivery

An owner may estimate jobs, supervise sites and maintain customer relationships as well as perform trade work. The earnings analysis should address reasonable compensation for those duties. Work performed by either spouse or other family members needs the same attention, including whether someone would need to replace it.

Management depth affects whether a successor could maintain operations. Review the roles of estimators and site supervisors, together with subcontractor arrangements and available capacity. Repeatedly winning work has less value if the company cannot deliver it at the forecast cost.

Where contracts require bonds, review the bonding program and any related indemnities. The Surety Association of Canada explains that underwriting considers financial condition, working capital and management, and that adverse changes can reduce available capacity. Existing bonding should not be assumed to continue unchanged under every ownership or financing arrangement. [4]

Fit the valuation method to the company

An earnings approach examines sustainable cash flow and its risks, while an adjusted net asset approach examines asset and liability values. The appropriate method depends on the business. Equipment needed to generate earnings should not be added again without reconciling how the earnings valuation already treats it.

Fleet condition and replacement requirements also matter. An equipment appraisal may be needed where machinery is material, and its date and assumptions must fit the assignment. Near-term replacement spending can affect cash flow even when the current equipment remains operational.

CBV Practice Standard 120 requires an understanding of the business and industry, consideration of relevant valuation methods and support for significant assumptions. These requirements apply at the Calculation level too. Material uncertainty over completion costs or a major claim needs an explicit treatment, including disclosure of any resulting scope limitation. [5]

Make the conclusion usable for both spouses

The report should explain how operating value becomes the value of the particular shares, including debt, excess cash and shareholder loans. Any estimated taxes or selling costs need stated assumptions. The share value supplies financial evidence for the family property accounting; counsel addresses the wider legal calculation.

Keep settlement funding separate from valuation. Cash needed to finance projects or satisfy contractual obligations cannot automatically be withdrawn without affecting operations. A proposed payment schedule may therefore require its own cash-flow assessment.

When approaching Acadia Hill, provide financial statements, job schedules and major contracts, together with records of significant claims and any equipment appraisals. Counsel’s valuation instructions help establish the relevant interest and dates. That allows the work to focus on the project assumptions that could materially change the result.

Peter Fast, CBV, Acadia Hill

This article provides general information and is not legal, tax or accounting advice. The appropriate scope depends on the purpose, intended users, available evidence and specific circumstances of the engagement. Family law counsel should advise on how the law applies to your situation.