How to Read Construction Financial Statements.
Commercial subcontractor owners need to read four documents fluently: the profit and loss statement (P&L), the balance sheet, the cash flow statement, and the work in progress (WIP) schedule. Each one answers a different question. Each one has construction-specific quirks that generic accounting knowledge misses. Reading all four takes about five minutes once you know what to look for.
Most subcontractor owners can read a bank statement. Fewer can read a P&L. Almost none can read a WIP schedule. This page is the construction-specific orientation that closes that gap.
The Profit and Loss Statement. Did You Make Money This Period?
The P&L answers one question: in this period, did revenue exceed costs, and by how much?
On a commercial subcontractor P&L, the rows you read in order:
Revenue. Total billings or earned revenue for the period. Under percentage of completion accounting, this is earned revenue, not what you actually invoiced. A sub with $10M of contracts billed for the month but only 60% of the work done shows $6M of earned revenue, not $10M.
Cost of revenue (direct job cost). Labor, materials, subs, equipment, and other costs that belong to specific jobs. The CFOS target is to see this line broken into its components so you can read each one separately.
Gross profit and gross margin. Revenue minus direct cost. For commercial subs, the CFOS target is 22% to 30% gross margin depending on trade. Concrete at $1M to $5M targets around 21% gross. Electrical at the same band targets 25% gross.
Overhead (G&A). Office rent, owner salary, controller, admin staff, software, insurance, professional fees. For a healthy commercial sub at $5M to $10M, target overhead is 13% to 15% of revenue.
Net profit and net margin. Gross profit minus overhead. The CFOS target net for a $12M sub is 12%. Most commercial subs in the $1M to $12M range run 4% to 8% net.
The Balance Sheet. What Do You Own, What Do You Owe?
The balance sheet is a snapshot of the business on one specific day. Assets on the left, liabilities and equity on the right. They must balance.
Construction-specific items to read carefully:
Accounts receivable. Money owed to you. Aged 0 to 30, 30 to 60, 60 to 90, and over 90. The over-90 bucket is the warning sign. If more than 15% of AR is over 90 days, you have a collections problem.
Retainage receivable. Money your GCs are holding back, typically 5% to 10% of pay apps. Usually a separate line from AR. Read this as locked cash that returns at substantial completion.
Underbillings (costs in excess of billings). Current asset. Costs you have incurred but not yet billed. A growing underbillings line means you are funding the project ahead of pay app submission. Common during mobilization, normal in moderation, dangerous if it grows month over month without resolving.
Overbillings (billings in excess of costs). Current liability. You have billed ahead of the work performed. Good for cash flow, fine in moderation, a red flag if it grows because it represents future revenue that has already been collected.
Line of credit drawn. Current liability. Reading the LOC balance over the last six months tells you whether the business is generating cash or consuming it. A consistently growing draw is a cash flow problem hiding behind operations that look profitable.
The Cash Flow Statement. Where Did the Cash Actually Go?
The cash flow statement reconciles net profit with actual cash movement. Net profit can be positive while cash is bleeding out, and vice versa. The cash flow statement is the document that explains the disconnect.
Three sections:
Cash from operating activities. The money your operations generated or consumed. Net profit plus depreciation and amortization, adjusted for changes in working capital (AR, AP, inventory). A healthy commercial sub generates positive cash from operations consistently. Negative is the warning sign.
Cash from investing activities. Money spent on equipment, vehicles, real estate. Usually negative for a growing sub buying capital assets.
Cash from financing activities. Money raised or returned through debt and equity. LOC draws, term loan payments, owner contributions or distributions.
The most useful read: if net profit is positive but cash from operations is negative, the cash is sitting in AR or underbillings. The business is profitable on paper, broke in the bank. That diagnosis is the entire pattern The Construction CFO solves.
The WIP Schedule. Which Jobs Are Actually Making Money?
The WIP schedule is the construction-specific document. No other industry has it. Every commercial subcontractor needs to read it.
Each row on the WIP is one job. The columns:
Contract value. Total contract amount including approved change orders.
Cost incurred to date. What has been spent.
Estimated cost to complete. What is left to spend. This is the column that matters most and the one most subs do not update honestly.
Percent complete. Cost incurred divided by total estimated cost.
Earned revenue. Percent complete times contract value.
Billings to date. What you have invoiced.
Over/underbilled. The difference between earned revenue and billings.
The two diagnostic questions: (1) Is any job showing earned revenue more than 10% below billings? That is overbilling, which means cash is good now but earnings are owed. (2) Is the estimated cost to complete moving up month over month on the same job? That is profit fade developing in real time.
Quotable benchmark: the top quartile of commercial subs runs profit fade at less than 2% across their portfolio. The bottom quartile runs 6% or more. Reading the WIP monthly catches it early enough to fix.
