Much like school picture day, a contractor’s financial statements and income tax returns capture a snapshot in time that can influence how the business is viewed for months to come. When reviewed by sureties, lenders, and other financial stakeholders, this snapshot reflects historical performance as well as how effectively the business plans, manages risk, and prepares for future opportunities. Over time, the snapshot becomes a reference point for evaluating financial strength, consistency, and readiness for future work.
What do Sureties, Lenders, and Other Stakeholders Evaluate?
At a high level, lenders, sureties, and other stakeholders are assessing whether the contractor’s overall financial picture demonstrates the ability to:
- Generate consistent profitability and grow equity over time
- Preserve working capital and deploy cash flow effectively
- Manage receivables and billings efficiently
- Support bonding and credit capacity without reliance on intercompany loans or related-party support
- Sustain project growth and competitive bidding activity
Financial statements and income tax returns provide insight into how well management understands the business and plans for the future. Stakeholders are not only reviewing reported results but also looking for evidence of a thoughtful tax strategy, including the effective use of available deductions, credits, and incentives to support cash flow and demonstrate financial discipline.
Preparing the Financial Statement Picture: 5 Tips and Tricks
In construction, where businesses often manage multiple projects at different stages of completion while balancing working capital demands and growth-related leverage, financial statements rarely appear flawless. Contractors can strengthen the financial picture by focusing on transparency and preparation, telling the story behind the numbers and ensuring they are understood and evaluated in the proper context.
1. Align Expectations with Financial Statement Users
Contractors benefit from maintaining a regular cadence of communication with their accountants, bankers, and surety teams throughout the year. These conversations help define expectations, particularly when the contractor anticipates pursuing increased bonding or credit capacity. Addressing non-recurring activities, such as intercompany transactions or significant distributions, can help provide a clearer understanding of how financial results align with strategic plans.
2. Anticipate and Address Areas of Scrutiny
By anticipating questions before they arise, contractors can prepare to explain any areas that indicate volatility or risk, including material margin shifts, under-billings, pending change orders, or timing-related variances. Collaboration with operations and project management teams helps support this narrative with current job-level data and field insights.
3. Use Gross Profit Gain or Fade Analysis to Support the Narrative
Gross profit gain or fade analysis is a standard tool used by lenders and sureties to evaluate estimating accuracy and project execution over time. Performing this analysis internally allows management to identify trends across projects, explain deviations from prior estimates, and assess cost-to-complete accuracy. These insights can be compared with benchmarking and historical performance data to inform discussions of consistency, risk management, and broader goals.
4. Demonstrate Disciplined Cash Flow Management
Cash flow is a central component in how financial statements are evaluated, as lenders and sureties assess current balances and how cash has been generated, deployed, and managed. The familiar phrase “cash is king” holds true, particularly during periods of growth that may place pressure on working capital.
While reviewing cash flow, contractors should focus on the following questions:
- Are billings and collections forecasted regularly and aligned with contractual terms and project schedules?
- Are invoices submitted in accordance with contract requirements and billing timing provisions?
- Do over-billings reflect earned progress, or do they represent short-term cash support?
- Are retention balances and reduction milestones actively monitored and managed?
- Does operating cash flow align with reported profitability, or are timing differences driving divergence?
Providing context around under-billings, unrestricted cash, and timing differences between income and cash flow helps financial partners assess whether cash usage reflects strategic growth or potential strain.
5. Present a Clear and Organized Entity Structure
Clearly identifying affiliated entities, explaining their purpose, and cleaning up or simplifying intercompany balances can help remove distractions from the financial statements. When the entity structure is straightforward and well understood, lenders and sureties can focus on core operations, project performance, and overall risk profile.
Preparing the Income Tax Picture: 4 Tips and Tricks
Just as financial statements provide a snapshot of operational performance, income tax results capture a separate but equally important picture. Tax reporting reflects how income is recognized, how cash flow is managed, and how planning decisions affect liquidity and flexibility.
1. Understand How Tax Accounting Methods Affect the Snapshot
Contractors benefit from understanding the available methods and how each may shape the snapshot being reviewed:
- Cash method: Aligns taxable income with collections, supporting near-term cash flow.
- Completed contract method: Defers income until project completion, improving liquidity but concentrating future tax exposure.
- Percentage of completion (IRC Section 460): Recognizes income as work progresses, accelerating tax obligations and increasing cash flow planning needs.
- Accrual method: Recognizes income as billed, which may strain cash flow if collections lag.
Understanding how each method affects timing and liquidity is especially important for contractors managing long-term projects or fluctuating backlog.
2. Incorporate Section 199A Into the Tax Planning Strategy
Section 199A can be a meaningful driver of tax efficiency for contractors operating through pass-through entities, allowing up to a 20% reduction of qualified business income at the individual level. Aligning compensation, entity structure, and capital investment decisions with Section 199A considerations signals proactive planning to lenders.
3. Strategically Leverage Available Credits
Tax credits offer dollar-for-dollar reductions of tax liability, and a contractor’s use of them can demonstrate a well-integrated approach to planning. The research and development credit is often overlooked in construction, even though qualifying activities may include process improvements, techniques, or software development. Fuel tax credits may also apply when fuel is used in off-road equipment, allowing contractors to recover certain federal excise taxes paid.
4. Utilize Section 179 and Bonus Depreciation
This year, the One Big Beautiful Bill Act reinforced accelerated depreciation as a planning opportunity for contractors making capital investments in 2025 and beyond. Expanded Section 179 expensing and restored 100% bonus depreciation allow contractors to manage the timing of deductions while investing in equipment, technology, and operational improvements.
Beyond tax impact, the thoughtful use of these provisions signals to lenders and sureties that management is up to date on legislative changes and intentional in aligning capital spending with cash flow and planning objectives.
Improve Your Financial Picture with Grassi
“Picture Day” may represent a moment in time, but preparing for it begins well before the reporting date. For contractors, the goal is to present a clear, consistent financial narrative that reflects how the business plans, manages risk, and positions itself for growth.
Whether the goal is to enhance liquidity, align tax strategy with financial reporting, evaluate tax credits and incentives, or prepare for growth and stakeholder evaluation, Grassi’s Construction advisors work collaboratively to strengthen your financial picture.
To learn more about how your construction business can better align financial reporting and tax strategy, contact Carl Oliveri, Construction Practice Leader and Partner, or a Grassi advisor today.
Frequently Asked Questions
What do lenders and sureties look for in a contractor’s financial statements? Lenders and sureties evaluate consistency in profitability, growth in equity, liquidity, cash flow management, receivables discipline, and the contractor’s ability to support bonding and credit capacity without undue risk.
Why do income tax results matter to lenders and sureties? Income tax results provide insight into how well a contractor plans for obligations, manages cash flow, and integrates tax strategy into overall financial decision-making. Thoughtful use of deductions, credits, and incentives signals financial discipline and maturity in planning.
How do tax accounting methods affect contractors? Tax accounting methods determine when income is recognized for tax purposes, which can influence cash flow, working capital, and estimated tax payments. Choosing the right method is especially important for contractors with long-term projects or fluctuating backlog.
What is Section 199A, and why is it important for contractors? Section 199A allows eligible pass-through businesses to deduct up to 20% of qualified business income. For many contractors, it is a significant driver of tax efficiency when aligned with compensation, entity structure, and capital planning decisions.
