How Much Is a Civil Contracting Business Worth?

What decides the value of a civil contracting business?

Civil contractors earn on contracts won one at a time, not from customers who return every month. The profit from one year therefore says less about the next than it does in most trades, and the valuation turns on what the business is likely to win, deliver and keep.

A valuer asks three things. What does the business earn in a typical run of contracts once the owner is paid a market wage? How much of the coming year is already won? And what could take that profit away: one principal, one project, a prequalification that does not carry over, or profit booked on work that is not finished?

Position on the contract matters as well. A principal contractor controls the program and the customer relationship but carries more risk and needs more working capital, while a subcontractor is more exposed to the head contractor’s decisions, pricing and payment. We note which position the business holds on each major contract.

The factors are set out on our page on civil contracting business valuations. Every figure below is illustrative. None is a benchmark and none describes a real business.

Why is one year of profit not enough?

Ground conditions, quantities, weather and cost rises can turn a fixed-price job from a good result into a loss, so the latest year is as likely to flatter a civil business as to understate it. We look at the margin on every material contract over several years, and at how often jobs finished below estimate and by how much.

In the example, Year 2 includes a fixed-price drainage job that hit rock and finished well below estimate. We ask whether that was genuinely unusual or the normal variability a buyer should expect. A business that does ground-dependent work should expect some bad jobs, so the average is the better starting point. The latest year’s gross profit of $860,000 is $200,000 above the average of $660,000.

How does the order book change the picture?

The order book shows how much of the coming year is already won. We take each contract in turn, estimate the gross profit still to be earned on it, and compare the total with the average above. The margin we use is our view of what the business is likely to earn on that kind of work, based on its own completed jobs, and not simply the margin in the quote.

Assuming these contracts finish within the coming year, which we check contract by contract, they hold $381,000 of gross profit still to be earned. The rest of the average has to come from tenders not yet won. The tender register, showing what was submitted, won, lost and pending over several years, is the evidence for whether that is realistic.

The two lenses work together. The earnings figure says what the business is worth if it keeps winning work at its average record. The order book says how much of that is in hand, and a business with most of the year secured is a different risk from one that is nearly out of work. Our guide on customer concentration and business value explains why it matters if one project or principal fills the book.

How is work in progress treated?

Profit on long contracts is recognised before it is received, and the cost to complete is an estimate. If the percentage-complete assumptions are optimistic, reported profit can reverse. We review the work in progress schedule, estimated costs to complete, variations and claims, and compare the margin booked with the margin on similar completed jobs. Profit that is booked but looks unlikely to be realised is not treated as maintainable.

Cash matters as well as profit. Principals often require performance security such as bank guarantees or insurance bonds, and hold retentions until completion or the end of the defects period, which ties up borrowing capacity. A buyer will ask how much headroom the facilities leave. How work in progress and claims are treated in your accounts is a question for your accountant.

Variations and claims can add profit or lock up cash. We separate the ones approved and paid from those disputed or still open, and look at the business’s record of getting paid for extra work. A claim that has been open for a long time is usually worth less to a buyer than its face value.

What reduces and what increases the value of a civil contracting business?

The list below separates what usually raises the risk applied to a civil contractor’s earnings from what usually lowers it. None changes the method, and the report should say whether each item changes the earnings we adopt or the risk we apply to them.

• Increases: prequalification or panel status that would carry over. The level held decides which contracts the business can bid for. Whether a particular authority would reassess it on a change of ownership is a question for that authority.
• Increases: a record of finishing at or above estimate. Margin by completed job shows whether the estimating can be relied on.
• Increases: a spread of customers and projects. Councils, utilities and developers follow different funding cycles.
• Increases: estimators and supervisors beyond the owner. Many civil owners are tradies who came up through the plant and still price every tender, and a buyer asks who else can.
• Reduces: most revenue from one project or one principal. The profit is real, but it ends with the project or the relationship.
• Reduces: unresolved claims and disputes. They can lock up cash for years and may never be recovered in full.
• Reduces: fixed-price work that carries ground and quantity risk without an allowance.
• Reduces: performance security facilities close to their limit. There is then little room to take on the next contract.

What should a civil contracting owner prepare for a valuation?

• an order book schedule with contract, customer, value, expected margin, dates and percentage complete
• a tender register for three years showing tenders submitted, won, lost and pending
• a work in progress schedule with cost to date, estimated cost to complete, claims and variations
• margin by completed contract against the estimate
• prequalification certificates or panel appointments, and recent audit reports for accreditations
• a schedule of bank guarantees, insurance bonds and retentions, with the facility limits

A matter with significant plant or heavy customer concentration may be scoped as a complex valuation, so check pricing to see what each covers. A draft report is provided before it is finalised. If your business also runs heavy machines, our guide on how much an earthmoving business is worth shows how plant and earnings are reconciled.