Your builder client just won a $2m contract – here's why you should be worried

Large contracts don't cause failure – they just accelerate what was already there.

The busiest construction companies I liquidated weren't failing. They were drowning in success they couldn't fund, based on numbers that looked great but didn't reflect reality.

Why big contracts become fatal

I've liquidated multiple residential builders who failed shortly after securing their largest contracts ever. It follows the same pattern every time.

The accountant reviews the financials. WIP looks strong. Cash flow projections seem manageable. The decision makes sense on paper.

Within six months, they're using progress payments from the new contract to fund old jobs. Within twelve months, they're insolvent.

What went wrong? The numbers the accountant reviewed weren't showing economic reality. They were showing something else entirely.

The numbers problem

Small construction companies have something their larger competitors don't – the ability to shape their financial data in ways that serve specific purposes. This isn't fraud. It's the perfectly legal flexibility that comes from producing Special Purpose Financial Reports (SPFR) – built for specific users like owners, insurers, and the ATO.

Not general purpose financial reports built to reflect economic reality for wider audiences.

Academic research describes this bluntly: because small builders are essentially "the ego of the owner," financial data can be – and often is – manipulated to achieve specific outcomes.

When numbers are adjusted for tax, insurance or lending, the truth disappears. Until a big contract exposes it.

Where it gets manipulated: Work in progress

Small builders produce special purpose financial reports – built for specific users like owners and the ATO. These reports follow accounting standards, but with flexibility in how they're applied. That flexibility gets used in ways that hide reality.

The tax minimisation

WIP gets minimised to defer tax liability. This is standard practice. Conservative valuations reduce taxable income. Builders pay less tax this year. Accountants facilitate this. Nothing wrong with it – until that conservative number becomes the only number anyone looks at.

The insurance problem

Home warranty insurance underwriters require general purpose financial reports to see true trading performance. They need to assess real risk. Real margins. Real cash flow. Yet many builders provide special purpose reports instead – the same reports optimised for tax minimisation. The result? Underwriters can't see the true position.

Builders either get approved for capacity they can't actually handle, or get declined because the reports don't show their real performance. This works against everyone. The builder. The insurer. And ultimately, the homeowners.

The growth assumption

Meanwhile, builders look at revenue growth and assume they can take on more work. They see turnover increasing. They feel busy. They think they're succeeding. But nobody's tracking actual project margins.

When builders win major contracts, they're relying on confidence built from incomplete information. The problem: nobody actually knew what real job margins looked like – not the builder, not the accountant, and not the insurer who approved their capacity.

Where it gets hidden: Director loan accounts

When accountants can't get explanations or source documents from their clients to explain a transaction, it gets written to the director loan account. The books balance. But nobody, especially the director, understands the growing liability described as a ‘director loan’.

In one builder I liquidated, the director loan account had grown to $220,000 over five years.

When traced, the entries were:

• Cash withdrawals that couldn't be categorised

• Supplier payments not matched to jobs

• Personal expenses without documentation

• Unexplained account transfers

The director thought the company had $220,000 more cash than it actually did. When big contracts land, accountants look at balance sheets and see equity. Directors see companies that can afford upfront costs. They're looking at equity that isn't real, and can't fund a thing.

When the contract arrives

This is where everything falls apart. A builder with adjusted financials sees a major contract opportunity.

WIP looks strong. The balance sheet shows equity. Cash flow projections suggest they can handle it. They sign the contract.

Then reality hits

Big jobs need cash before any money comes in. Fixed-price contracts create hidden losses when costs rise. The gaps between paying suppliers and receiving progress payments are larger than modelled. Because the model used adjusted WIP, not actual margins.

The pattern repeats:

Material costs spike on fixed-price contracts. Subcontractors need payment before progress claims arrive. The "equity" in director loan accounts can't be accessed. Real margins prove far lower than the insurance WIP showed.

The result:

New progress payments fund old jobs. Subcontractors go unpaid and threaten legal action. Home warranty insurers review capacity based on actual performance.

Insolvency.

The accountant keeps asking: "But the financials looked fine when we reviewed them?" They did. For tax purposes. For insurance purposes. Just not for taking on the biggest contract in company history.

The stress test you should run

Before your construction client signs a major contract, stop celebrating the revenue growth.

Start asking these questions:

Can they fund the upfront costs?

Not based on WIP you've adjusted for insurance. Based on actual cash available.

Materials, subcontractors, deposits – these need real money, not adjusted balance sheets.

What's the cash gap?

How long between paying suppliers and receiving progress payments?

Most builders estimate 30 days. Reality is often 60-90 days once you factor in claim preparation, client review, and payment processing.

Can they survive that gap? With actual cash, not phantom equity from director loan accounts?

Have they stress-tested the margin?

What happens if material costs increase 10 per cent? 20 per cent?

What if labour shortages drive up subcontractor prices? What if the project runs three months over schedule?

Their margin needs to absorb this. Do you know their real margin – not the WIP margin adjusted for tax or insurance?

Do they have contingency funding?

If something goes wrong, where does the money come from? Not from director loan accounts that represent unexplained transactions. Not from WIP that's been adjusted for compliance purposes.

From actual accessible cash or facilities.

What if the client delays payment?

Major projects often have payment disputes. What happens if the client delays final payment by 60 days? 90 days? Can they fund payroll, suppliers, and other projects while waiting?

What this means for accountants

When you review financials before a big contract decision, you need to know what you're looking at. WIP adjusted for insurance isn't the number your client should use for capacity decisions. Director loan accounts used to balance unexplained transactions aren't equity that they can access. The numbers and the cash don't match. That gap becomes fatal when big contracts arrive.

What strategic advisory looks like

Create real management numbers: Before your client considers major contracts, calculate actual project margins. Separate from your tax and insurance WIP.

Clean up director loan accounts: Stop using these as balancing tools. If there's $150,000 in the director loan account, make sure it represents real accessible funds, not reconciliation entries.

Stress-test big opportunities: Run scenarios with actual numbers:

• 10-20 per cent cost overruns

• 60-90 day payment delays

• Extended project timelines

• Supplier payment requirements

Document the gaps: If your client is making decisions based on adjusted numbers, document that clearly. Make sure they understand the WIP they're seeing is presented for insurance, not for capacity planning.

The challenge

Stop celebrating when your construction clients land big contracts. Start asking whether they can afford to service that revenue with their actual financial position – not the one you've presented for compliance purposes.

The question isn't whether you're shaping your construction clients' financial data. You probably are. Your clients probably expect you to.

The real question: when they're making the biggest business decision of their life, do they understand the difference between the numbers you've presented and the underlying economic reality?

Because if they don't, that major contract isn't an opportunity. It's the thing that finally exposes the gap between the numbers and the cash. And when I liquidate their company, you'll be asking: "But the financials looked fine?"

They did, for compliance purposes. Just not for taking on the biggest contract in company history.

Before your client signs that contract:

Check actual WIP margins – not the ones adjusted for tax or insurance. Verify accessible cash – not phantom equity in director loan accounts. Stress-test the gaps  between paying suppliers and receiving progress payments. Question the confidence – if it's based on adjusted numbers, it's false confidence.

Eddie Senatore is a Fellow of Chartered Accountants Australia and New Zealand with over 30 years of experience in business recovery and insolvency.