Blog · Finance metrics and formulas · Construction
Compare contractor liquidity, leverage and margins from financial exports. A worked example shows why retainage, contract assets and billing timing change the interpretation.
Financial ratios for construction companies are useful when liquidity, leverage and margins are read beside retainage, work in progress and billing schedules. A higher asset balance can coexist with less available cash, and rising revenue can coexist with weaker profitability. Calculate a small, consistent set first, then explain the movement from the underlying jobs.
Use a quarter-end balance sheet, the quarter's income statement, a receivables aging, and the job work-in-progress schedule. Obtain the same exports for the preceding quarter. Keep the legal entities, accounting policies and cutoff dates consistent.
The SEC's financial statement guide distinguishes balance-sheet snapshots from income-statement activity over a period. That matters here: closing liabilities come from one date; revenue and cost cover the entire quarter. A monthly margin cannot be compared directly with a year-to-date margin when project mix changes.
Map balances into agreed categories before calculating. Split retainage from ordinary billed receivables without adding it twice. Separate contract assets from stored materials and equipment. Quanta's annual financial statements illustrate the distinction: contract assets reflect recognized revenue exceeding billings, while contract liabilities reflect billings exceeding recognized revenue.
Use the general financial ratios guide for the broader formula set. The contractor's additional task is explaining how project accounting and payment terms affect those formulas.
Consider an illustrative US general contractor. All balances below are USD. Retainage is separately presented within current assets and excluded from the ordinary receivables row. The controller has confirmed the classifications; noncurrent assets include equipment used on jobs.
| Export row | First quarter (USD) | Second quarter (USD) |
|---|---|---|
| Cash | 400,000 | 300,000 |
| Billed receivables, excluding retainage | 1,200,000 | 1,300,000 |
| Current retainage receivable | 300,000 | 400,000 |
| Contract assets | 500,000 | 700,000 |
| Other current assets | 100,000 | 100,000 |
| Current assets | 2,500,000 | 2,800,000 |
| Noncurrent assets | 1,300,000 | 1,500,000 |
| Total assets | 3,800,000 | 4,300,000 |
| Accounts payable and accrued expenses | 1,000,000 | 1,200,000 |
| Contract liabilities | 400,000 | 600,000 |
| Current borrowings | 100,000 | 200,000 |
| Current liabilities | 1,500,000 | 2,000,000 |
| Noncurrent liabilities | 800,000 | 800,000 |
| Total liabilities | 2,300,000 | 2,800,000 |
| Equity | 1,500,000 | 1,500,000 |
| Quarterly revenue | 2,500,000 | 3,000,000 |
| Quarterly job costs | 2,100,000 | 2,580,000 |
| Quarterly operating overhead | 250,000 | 300,000 |
To reproduce the calculations, put the labels in column A and the two periods in B and C. With Cash on row 2, Current assets is row 7, Current liabilities row 13, Total liabilities row 15, Equity row 16, Revenue row 17, Job costs row 18 and Overhead row 19. Calculate these summary cells, then copy each formula across:
Current ratio: =B7/B13
Working capital: =B7-B13
Gross margin: =(B17-B18)/B17
Operating margin: =(B17-B18-B19)/B17
Total liabilities to equity: =B15/B16
Leave a ratio unreported if its denominator is zero; investigate the input rather than converting an undefined result into zero. Ratios below are rounded to two decimals and margins to one decimal percentage point.
| Measure | First-quarter calculation | Result (USD or ratio as labeled) | Second-quarter calculation | Result (USD or ratio as labeled) |
|---|---|---|---|---|
| Current ratio | 2,500,000 / 1,500,000 | 1.67 | 2,800,000 / 2,000,000 | 1.40 |
| Working capital (USD) | 2,500,000 - 1,500,000 | 1,000,000 | 2,800,000 - 2,000,000 | 800,000 |
| Gross profit (USD) | 2,500,000 - 2,100,000 | 400,000 | 3,000,000 - 2,580,000 | 420,000 |
| Gross margin | 400,000 / 2,500,000 | 16.0% | 420,000 / 3,000,000 | 14.0% |
| Operating profit (USD) | 400,000 - 250,000 | 150,000 | 420,000 - 300,000 | 120,000 |
| Operating margin | 150,000 / 2,500,000 | 6.0% | 120,000 / 3,000,000 | 4.0% |
| Total liabilities to equity | 2,300,000 / 1,500,000 | 1.53 | 2,800,000 / 1,500,000 | 1.87 |
This leverage measure includes trade and contract liabilities. Label it explicitly; a ratio using only interest-bearing debt answers a different question.
The contractor has more current assets, yet working capital falls by $200,000. Current assets rise by $300,000 while current liabilities rise by $500,000. Retainage plus contract assets increases from $800,000 to $1,100,000, even as cash falls by $100,000.
That combination calls for a billing and collection review. It does not prove that the contract assets are bad or the business is insolvent. Ask which milestones remain, who must approve payment, and whether receipts precede the next subcontractor and payroll payments. The focused construction current-ratio guide covers that liquidity-quality review.
Gross profit increases by $20,000, calculated as $420,000 minus $400,000, but gross margin falls by two percentage points. Operating margin also falls by two percentage points. Management should inspect project mix, revised cost estimates and overhead before treating revenue growth as improved performance.
The controller owns definitions and reconciliations. Project managers explain job estimates and billing obstacles; treasury owns expected receipt dates and funding. Ratios identify the conversation. The construction financial model is the next step when management needs to compare future assumptions.
Both balance sheets must balance: $3,800,000 equals $2,300,000 plus $1,500,000; $4,300,000 equals $2,800,000 plus $1,500,000. The current-asset and liability detail must sum to their displayed subtotals.
Reconcile project revenue and job costs to the income statement, then reconcile receivables and contract balances to their ledger accounts. Explain unmatched entries, including corporate costs and completed projects. The broader construction statement analysis connects those reconciliations to cash.
Upload your financial statements and supporting contractor schedules; Covirage maps the columns, and its tools compute and check the ratios. The external AI model explains the movement with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for construction for the industry context.
Start with liquidity, profitability and leverage measures that management can reconcile to the financial statements. Current ratio, working capital, gross margin, operating margin and total liabilities to equity give a useful starting set. Add project and billing detail to explain movement.
No single threshold describes every contractor. Contract terms, equipment ownership, project duration and retainage affect the comparison. Use the definition in any lending agreement for compliance, then examine your own trend and the timing of expected receipts and payments.
Keep the reported calculation consistent with the financial statements and identify retainage separately. A management sensitivity can exclude amounts unavailable during a particular planning horizon, but label that adjustment clearly. It does not replace the reported ratio or a lender's defined calculation.