The Terms Your Accountant
Should Have Already Explained.
Plain-language definitions of the accounting, tax, and business terms that matter most for growing businesses. No jargon. No filler. Just the concepts you need to make better decisions.
38 terms across 6 categories — each with a custom visual, a real example, and cross-links to related concepts.
Last updated: March 2026
WIP Accounting
Work-in-Progress accounting — the method that shows what a project-based business actually earned, not just what it billed.
Without WIP accounting, a contractor can show $500K in profit in Q1 and a $200K loss in Q2 — on the same project. It's not that the project changed; it's that cash-basis accounting misrepresents when revenue is actually earned. WIP accounting matches revenue to the percentage of work completed, giving lenders, bonding companies, and owners an accurate picture of financial performance.
Any business that works on multi-month contracts — general contractors, specialty trades, engineering firms, software developers, and professional services firms with project-based billing. If you have projects that span accounting periods, you need WIP accounting to understand your true financial position.
Cash Flow & Liquidity
6 terms
13-Week Cash Flow Forecast
A rolling 13-week projection of cash inflows and outflows
A 13-week cash flow forecast is a rolling, week-by-week projection of every dollar expected to come in and go out of a business over the next 91 days. It is the most widely used short-term liquidity management tool in business finance — used by turnaround consultants, lenders, and CFOs to identify cash gaps before they become crises.
Most business owners manage cash reactively — they look at the bank balance and make decisions based on what's there today. A 13-week forecast changes that. It makes cash gaps visible 4–8 weeks before they hit, giving you time to act: delay a purchase, accelerate a collection, draw on a line of credit, or renegotiate a payment term.
Cash Conversion Cycle (CCC)
How long it takes to convert inventory and work into cash
The Cash Conversion Cycle measures the number of days between when a business spends cash (on materials, labor, or inventory) and when it receives cash from customers. It is calculated as: Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding.
A long CCC means your business is funding operations with its own cash for extended periods — which strains liquidity and limits growth. Shortening the CCC (by collecting faster, paying slower, or turning inventory quicker) is one of the highest-leverage financial improvements available to most growing businesses.
Working capital is the difference between a company's current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt, accrued expenses). It represents the liquid resources available to fund day-to-day operations. Positive working capital means the business can meet its short-term obligations; negative working capital is a warning sign.
Working capital is the most direct measure of a business's short-term financial health. Banks look at it when evaluating credit. Buyers look at it when valuing a business. And owners who don't monitor it often find themselves cash-poor even when revenue is strong — because growth consumes working capital faster than profit generates it.
Days Sales Outstanding (DSO)
The average number of days it takes to collect payment after a sale
Days Sales Outstanding (DSO) measures how long, on average, it takes a business to collect payment after completing a sale or delivering a service. It is calculated as: (Accounts Receivable ÷ Total Revenue) × Number of Days. A lower DSO means faster cash collection; a higher DSO means cash is tied up in unpaid invoices.
DSO is one of the most actionable cash flow levers available to most businesses. Reducing DSO by 10 days on $3M in annual revenue frees up approximately $82K in cash — without changing a single thing about operations or profitability.
A professional services firm had a DSO of 52 days. By implementing upfront deposits, net-15 payment terms (instead of net-30), and automated invoice reminders, they reduced DSO to 28 days within 90 days — freeing up over $60K in cash that had been sitting in outstanding invoices.
Line of Credit (LOC)
A revolving credit facility that lets you borrow up to a set limit as needed
A business line of credit is a revolving credit facility from a bank or lender that allows a business to borrow up to a pre-approved limit, repay it, and borrow again — as needed. Unlike a term loan, you only pay interest on what you've drawn. Lines of credit are typically used to fund working capital gaps, seasonal cash flow swings, or short-term operational needs.
The most important thing about a line of credit is that you need to get it before you need it. Banks approve lines of credit based on financial strength — when your books are clean, your cash flow is positive, and your business is growing. If you wait until you're in a cash crisis to apply, you'll almost certainly be declined.
A Bozeman contractor secured a $250K line of credit in March when their financials were strong. In October, a large project was delayed and they needed $180K to cover payroll and materials for 6 weeks. Because the line was already in place, they drew on it the same day — avoiding a crisis that would have required laying off crew.
Burn Rate
How fast a business is spending its cash reserves
Burn rate is the rate at which a business is spending its cash — typically expressed as a monthly figure. Gross burn rate is total monthly cash outflows. Net burn rate is the difference between cash outflows and cash inflows (i.e., how much cash the business is losing per month). Runway is calculated by dividing current cash by monthly net burn rate.
Burn rate and runway are the most critical metrics for any business in a cash-constrained situation — whether that's a startup, a turnaround, or a seasonal business in its slow season. Knowing your runway tells you exactly how much time you have to fix the problem before you run out of options.
Tax & Compliance
6 terms
S-Corp Election
A tax election that can reduce self-employment tax for profitable small businesses
An S-Corp election (IRS Form 2553) allows a business — typically an LLC or C-Corp — to be taxed as an S-Corporation. In an S-Corp, the owner pays themselves a reasonable salary (subject to payroll taxes), and takes additional profit as a distribution (not subject to self-employment tax). This split can significantly reduce the owner's total tax burden when the business is profitable.
Self-employment tax is 15.3% on the first ~$160K of net income and 2.9% above that. For a business earning $200K in net profit, the difference between a sole proprietor and a properly structured S-Corp can be $10,000–$20,000 in annual tax savings. But the election only makes sense above a certain profit threshold — and the salary must be reasonable or the IRS will reclassify distributions.
Reasonable compensation is the salary that an S-Corp owner-employee must pay themselves for services rendered to the corporation. The IRS requires that S-Corp owners who work in the business receive a salary comparable to what they would pay an unrelated employee to perform the same services. Paying below-market salary to avoid payroll taxes is one of the most common S-Corp audit triggers.
Getting reasonable compensation wrong — in either direction — is expensive. Too low, and the IRS can reclassify distributions as wages, triggering back payroll taxes, penalties, and interest. Too high, and you're overpaying payroll taxes unnecessarily. The right number requires analysis of your industry, role, hours worked, and business profitability.
Pass-Through Entity Tax (PTET)
A state-level tax election that bypasses the federal SALT deduction cap
A Pass-Through Entity Tax (PTET) election allows S-Corps and partnerships to pay state income tax at the entity level rather than at the individual owner level. Because the entity-level payment is a business expense, it is fully deductible on the federal return — effectively bypassing the $10,000 federal SALT deduction cap that otherwise limits the deductibility of state taxes for individual owners.
For business owners in states with meaningful income taxes (Oregon, Colorado, Idaho, Washington B&O), the PTET election can be one of the most valuable tax planning moves available. Most states enacted PTET elections in 2021–2022 in response to the SALT cap, but many business owners still aren't using them.
A Colorado S-Corp owner with $300K in business income owed $13,200 in Colorado state tax. Under the SALT cap, only $10,000 was deductible on the federal return — leaving $3,200 undeductible. After electing PTET, the full $13,200 was paid at the entity level and deducted as a business expense, saving approximately $1,188 in federal taxes (at 37% rate).
SALT Deduction Cap
The $10,000 federal limit on deducting state and local taxes
The SALT (State and Local Tax) deduction cap, enacted in the 2017 Tax Cuts and Jobs Act, limits the federal deduction for state and local taxes — including state income tax, property tax, and local taxes — to $10,000 per year for individuals and married couples filing jointly. For business owners in high-tax states, this cap significantly increases their effective federal tax rate.
Before 2018, business owners could deduct 100% of their state income taxes on their federal return. The $10,000 cap changed that. For an Oregon business owner paying $25,000 in state income tax, $15,000 is now non-deductible — costing an additional $5,550 in federal taxes at the 37% rate. The PTET election is the primary workaround.
An Idaho business owner paid $18,000 in state income tax. Under the SALT cap, only $10,000 was deductible, leaving $8,000 non-deductible. At a 35% federal rate, that's $2,800 in additional federal taxes compared to pre-2018 rules. The PTET election would have eliminated this additional cost entirely.
Tax Resolution
The process of resolving outstanding tax debt with the IRS or state tax authorities
Tax resolution encompasses the strategies and processes used to resolve unpaid tax liabilities with the IRS or state tax agencies. This includes installment agreements (paying over time), Offers in Compromise (settling for less than owed), Currently Not Collectible status (temporary suspension of collection), penalty abatement (reducing or eliminating penalties), and innocent spouse relief.
IRS collection actions — liens, levies, wage garnishments, bank seizures — can destroy a business. A federal tax lien becomes public record and can prevent refinancing, selling assets, or securing new credit. Acting early and with professional representation almost always results in better outcomes than ignoring the problem or trying to handle it alone.
WIP Accounting (Work in Progress)
The method of recognizing revenue and costs on long-term contracts as work is completed
Work in Progress (WIP) accounting — also called percentage-of-completion accounting — is the method used to recognize revenue and costs on long-term contracts as work is performed, rather than when the contract is complete or cash is received. It requires calculating the percentage of a project that is complete (based on costs incurred vs. total estimated costs) and recognizing that percentage of the total contract revenue in the current period.
WIP accounting is the difference between financial statements that tell the truth about a construction or project-based business and financial statements that are misleading. Without WIP, a contractor might show a profitable month because they billed heavily — when in reality they're over-billed on a project that's going to lose money. Banks, bonding companies, and sophisticated buyers all require proper WIP schedules.
Financial Reporting
6 terms
Accrual accounting is the method of recording financial transactions when they are earned or incurred, regardless of when cash is received or paid. Revenue is recognized when a product is delivered or a service is performed. Expenses are recognized when they are incurred, even if the invoice hasn't been paid.
Accrual accounting gives a more accurate picture of a business's financial performance. Cash-basis accounting can be deeply misleading — a business can look profitable in a month when it collected a lot of old receivables, and look unprofitable in a month when it did a lot of work but hasn't billed yet. Banks, investors, and buyers require accrual-basis financials.
Gross Margin
Revenue minus direct costs — the profit before overhead
Gross margin is the difference between revenue and the direct costs of delivering that revenue (cost of goods sold or cost of services). It is expressed as a percentage: Gross Margin % = (Revenue − COGS) ÷ Revenue × 100. Gross margin represents the profit available to cover overhead, pay the owner, and generate net income.
Gross margin is the most fundamental measure of a business's pricing and cost efficiency. A business with a 15% gross margin has $15 to cover overhead for every $100 in revenue. A business with a 40% gross margin has $40. The difference determines whether the business can survive, grow, and generate meaningful owner income. Most business owners focus on revenue — gross margin is more important.
EBITDA
Earnings before interest, taxes, depreciation, and amortization — a proxy for operating cash flow
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is calculated by taking net income and adding back interest expense, income taxes, depreciation, and amortization. EBITDA is widely used as a proxy for operating cash flow and as the basis for business valuation multiples.
EBITDA is the language of business valuation. When a buyer says they're paying '4x EBITDA,' they mean they're paying 4 times the business's EBITDA. For a business with $500K in EBITDA, that's a $2M valuation. Understanding your EBITDA — and the adjustments that affect it — is essential for anyone thinking about selling their business.
A business had net income of $120K. It also had $40K in interest expense, $80K in depreciation, and $30K in owner add-backs. Adjusted EBITDA was $270K. At a 3.5x multiple, the business was worth $945K — not the $420K a buyer might have offered based on net income alone.
Chart of Accounts
The organized list of all accounts used to record financial transactions
A chart of accounts (COA) is the complete, organized list of every account a business uses to record financial transactions. It includes assets, liabilities, equity, revenue, and expense accounts — each with a unique account number and name. The structure of the chart of accounts determines the quality and usefulness of every financial report the business produces.
A poorly structured chart of accounts is one of the most common and most expensive problems in small business accounting. When expenses are miscategorized, financial statements are misleading. When revenue isn't broken out by service line or job type, you can't see which parts of the business are profitable. A well-designed COA is the foundation of every useful financial report.
A contractor had all labor costs in a single 'Labor' account. When margins started declining, they couldn't tell if the problem was field labor, project management, or overtime. After restructuring the COA to separate direct labor by crew type and job phase, they identified that overtime on small jobs was costing them 4 points of gross margin.
Deferred Revenue
Cash received before the service is delivered — a liability, not income
Deferred revenue (also called unearned revenue) is cash received from a customer before the related service has been performed or product delivered. Under accrual accounting, this cash is recorded as a liability — not revenue — because the business still owes the customer the service. It is recognized as revenue only as the service is delivered.
Misclassifying deferred revenue as income is a common error that overstates profitability. A business that receives large deposits or annual prepayments can look very profitable on a cash basis while actually having significant obligations outstanding. Lenders and buyers look carefully at deferred revenue balances when evaluating a business.
Owner add-backs are expenses that appear on the business's income statement but are personal, discretionary, or non-recurring — and would not be incurred by a new owner. Common add-backs include: owner salary above market rate, personal vehicle expenses, personal travel, family member salaries, one-time legal fees, and non-recurring repairs. Add-backs are used to calculate Seller's Discretionary Earnings (SDE) or Adjusted EBITDA for valuation purposes.
Add-backs directly increase the value of your business. A business with $100K in net income but $150K in legitimate add-backs has $250K in adjusted earnings — which at a 3x multiple is worth $750K, not $300K. Documenting and presenting add-backs correctly is one of the most important things a seller can do before going to market.
Business Operations
5 terms
Job Costing
Tracking revenue and costs at the individual job or project level
Job costing is the accounting method of tracking all revenue, direct labor, materials, subcontractor costs, and overhead allocations for each individual job or project. It produces a job-level profit and loss statement that shows exactly how much each project earned and cost. Job costing is the foundation of profitability analysis for contractors, project-based businesses, and any company that prices work on a per-job basis.
Without job costing, you're managing your business on averages — and averages hide the jobs that are killing your margins. Most contractors who implement job costing for the first time discover that 20–30% of their jobs are unprofitable, and that a small number of job types or customers generate the majority of their profit. That information changes how you price, bid, and choose work.
Break-Even Analysis
The revenue level at which a business covers all costs and generates zero profit
Break-even analysis calculates the exact revenue level at which a business's total revenue equals its total costs — the point where profit is zero. It is calculated as: Fixed Costs ÷ Gross Margin %. Above break-even, the business is profitable. Below break-even, it is losing money. Break-even analysis is the foundation of pricing decisions, capacity planning, and growth modeling.
Every business owner should know their break-even number by heart. It tells you the minimum revenue you need to cover your overhead, how much revenue you need to justify a new hire, and how a price change affects your profitability. Most business owners don't know their break-even — and that's why they take on unprofitable work without realizing it.
Accounts payable represents the amounts a business owes to its vendors, suppliers, and subcontractors for goods or services received but not yet paid. It is a current liability on the balance sheet. Managing accounts payable strategically — paying on time to maintain relationships, but not early to preserve cash — is an important component of working capital management.
AP management is a cash flow lever that most businesses underutilize. Extending payment terms from net-15 to net-30 on $500K in annual vendor spend frees up approximately $20K in cash at any given time. Conversely, paying early without capturing early-payment discounts is leaving money on the table.
Accounts Receivable (AR)
Money owed to the business by customers — a current asset
Accounts receivable represents the amounts customers owe a business for goods delivered or services performed but not yet paid. It is a current asset on the balance sheet. AR management — including invoicing promptly, following up on overdue accounts, and setting clear payment terms — directly affects cash flow and working capital.
AR is often the largest current asset on a service business's balance sheet — and the most neglected. Many business owners are uncomfortable asking for money, so invoices go out late, follow-ups don't happen, and cash that should be in the bank is sitting in customer accounts. Every dollar in AR is a dollar you've earned but can't spend.
A professional services firm had $180K in AR, of which $60K was over 60 days old. After implementing a systematic follow-up process — automated reminders at 15, 30, and 45 days, with a personal call at 60 days — they collected $48K of the aged AR within 45 days and reduced their average DSO from 52 to 31 days.
Overhead Allocation
The method of distributing indirect costs across jobs, departments, or service lines
Overhead allocation is the process of distributing indirect costs — rent, utilities, insurance, administrative salaries, equipment depreciation — across jobs, projects, departments, or service lines. The allocation method (per labor hour, per revenue dollar, per square foot, etc.) determines how accurately each job or service line reflects its true cost.
Incorrect overhead allocation leads to mispriced work. If overhead is allocated based on revenue dollars but some jobs are more labor-intensive than others, high-labor jobs will be undercosted and appear more profitable than they are. This leads to bidding too low on the wrong work and too high on the right work.
A contractor allocated overhead based on revenue. A $100K job with 80% subcontracted work was allocated the same overhead as a $100K job done entirely with in-house labor — even though the in-house job consumed 4x more management time, equipment, and administrative support. After switching to labor-hour-based allocation, the true cost of self-performed work became visible and pricing was adjusted accordingly.
Growth & Exit
5 terms
Business Valuation
The process of determining the economic value of a business
| EBITDA | 2× | 3× | 4× | 5× |
|---|---|---|---|---|
| $200K | $0.4M | $0.6M | $0.8M | $1.0M |
| $350K | $0.7M | $1.1M | $1.4M | $1.8M |
| $500K | $1.0M | $1.5M | $2.0M | $2.5M |
| $750K | $1.5M | $2.3M | $3.0M | $3.8M |
Business valuation is the process of determining the fair market value of a business. For small and mid-sized businesses, the most common methods are: (1) EBITDA multiple — applying an industry-specific multiple to adjusted EBITDA; (2) Seller's Discretionary Earnings (SDE) multiple — used for smaller businesses where the owner works in the business; and (3) Asset-based valuation — used when the business's value is primarily in its assets rather than earnings.
Most business owners dramatically underestimate or overestimate the value of their business. Understanding how buyers value businesses — and what drives the multiple — allows owners to make decisions years before a sale that meaningfully increase the exit value. The difference between a 2x and 4x EBITDA multiple on a $500K EBITDA business is $1 million.
Seller's Discretionary Earnings (SDE)
The total financial benefit to a working owner — net income plus add-backs
Seller's Discretionary Earnings (SDE) is the total financial benefit available to a single working owner from a business. It is calculated as: Net Income + Owner's Salary + Owner Add-Backs + Depreciation & Amortization + Interest. SDE is the primary valuation metric for small businesses (typically under $5M in revenue) where the owner works in the business.
SDE is the number buyers use to value small businesses. A business with $80K in net income but $200K in owner salary and $50K in add-backs has $330K in SDE — which at a 2.5x multiple is worth $825K. Understanding SDE helps owners see the true economic value of their business and make decisions that maximize it.
Owner dependency is the degree to which a business's revenue, relationships, and operations depend on the personal involvement of the owner. A highly owner-dependent business — where the owner holds all key customer relationships, makes all significant decisions, and is the primary technical expert — is less valuable and harder to sell than a business with documented systems, a capable team, and transferable customer relationships.
Owner dependency is one of the most significant value destroyers in small business. A buyer who is paying for a business that will lose its key relationships and capabilities when the owner leaves is taking on enormous risk — and will price that risk into the offer. Reducing owner dependency is one of the highest-ROI investments a business owner can make in the years before a sale.
SBA Loan
A government-backed small business loan with favorable terms
An SBA loan is a small business loan partially guaranteed by the U.S. Small Business Administration. The SBA doesn't lend directly — instead, it guarantees a portion of loans made by approved lenders, reducing the lender's risk and enabling more favorable terms for borrowers. The most common SBA loan programs are the 7(a) loan (general purpose, up to $5M) and the 504 loan (real estate and equipment, up to $5.5M).
SBA loans offer lower down payments, longer repayment terms, and lower interest rates than conventional business loans — making them one of the most valuable financing tools available to small businesses. They are commonly used for business acquisition, equipment purchases, real estate, and working capital. The key to approval is having clean, well-organized financial statements that pass underwriting review.
A Montana business owner wanted to acquire a competitor for $800K. A conventional bank loan required 30% down ($240K). An SBA 7(a) loan required only 10% down ($80K), had a 10-year repayment term instead of 5, and carried a rate 1.5% lower than the conventional option. The SBA loan made the acquisition possible without depleting the owner's working capital.
Growth Readiness
The financial and operational capacity of a business to absorb and sustain growth
Growth readiness is an assessment of whether a business has the financial infrastructure, operational systems, team capacity, and cash flow to absorb and sustain significant revenue growth without breaking. A business that is not growth-ready will often experience declining margins, cash flow crises, quality problems, and owner burnout as revenue increases — because the systems and infrastructure can't keep up.
Growth is not inherently good. Rapid revenue growth in a business without the financial infrastructure to support it is one of the most common causes of business failure. Knowing whether your business is growth-ready — and what needs to be built before you scale — is the difference between growth that creates value and growth that destroys it.
A landscaping company grew from $800K to $1.4M in revenue in 18 months after winning several large commercial contracts. But they hadn't built the financial systems, crew management processes, or cash flow infrastructure to support the growth. By month 14, they were 90 days behind on payables, had lost two key crew leaders, and were drawing on personal credit to make payroll. Revenue growth had made the business less stable, not more.
Trades & Construction
10 terms
Retainage
A percentage of contract payments withheld until project completion
Retainage (also called retention) is a portion of the contract price — typically 5–10% — that the project owner withholds from each progress payment until the project is substantially complete or all punch list items are resolved. It is standard practice in construction and is meant to ensure the contractor completes the work as specified.
Retainage is one of the most significant cash flow challenges in construction. On a $1M project with 10% retainage, $100K is withheld until the end — sometimes for 6–12 months after the work is done. Without proper cash flow forecasting that accounts for retainage timing, contractors routinely run out of cash on projects that are technically profitable.
Certified Payroll
Detailed payroll records required on federally funded construction projects
Certified payroll is a weekly payroll report required on federally funded construction projects subject to the Davis-Bacon Act. It documents each worker's name, hours worked, job classification, wage rate paid, and fringe benefits — and must be submitted to the contracting agency weekly. The purpose is to verify that workers are being paid the federally mandated prevailing wage for their classification.
Certified payroll compliance is non-negotiable on federal and most state-funded projects. Errors, late submissions, or misclassifications can result in project suspension, back-wage liability, debarment from future federal contracts, and criminal penalties. Many contractors underestimate the administrative burden and cost of certified payroll compliance when bidding government work.
Prevailing wage is the minimum hourly wage, benefits, and overtime rates that must be paid to workers on government-funded construction projects, as determined by the U.S. Department of Labor (Davis-Bacon Act) or state equivalents. Prevailing wages vary by trade classification, county, and project type — and are updated periodically. They are typically significantly higher than market wages in rural areas.
Prevailing wage requirements can dramatically increase labor costs on government projects compared to private work. A contractor who bids a government project using their standard labor rates — without accounting for prevailing wage differentials — can easily underbid by 15–25% on labor alone. Accurate prevailing wage analysis is essential before submitting any public works bid.
Mobilization Costs
The upfront costs of getting equipment, crew, and materials to a job site
Mobilization costs are the expenses incurred to move equipment, crew, and materials to a job site before productive work begins — including transportation, equipment setup, temporary facilities, permits, and initial site preparation. On many projects, mobilization costs are significant and are often billed as a separate line item or included in the first progress payment.
Mobilization costs are frequently underestimated or ignored in job costing, particularly on small jobs. A contractor who doesn't account for the full cost of mobilization — including the time to load, transport, set up, and demobilize equipment — will consistently underprice small jobs and wonder why they're not profitable despite being busy. This is the core insight behind focusing on job size optimization.
A paving contractor thought small residential jobs were profitable because the paving itself took half a day. But a full cost analysis revealed that mobilization (loading equipment, driving to site, setup, teardown, return) added 4–5 hours to every job regardless of size. A $2,500 driveway that took 9 hours of total crew time was generating $18/hour — below minimum wage when overhead was factored in.
Change Order Accounting
The process of tracking, pricing, and collecting payment for scope changes on a contract
Change order accounting is the process of documenting, pricing, approving, and collecting payment for work that falls outside the original contract scope. A change order is a written agreement between the contractor and owner that modifies the original contract — adjusting the scope, price, schedule, or all three. Proper change order management is one of the most significant factors in construction profitability.
Unapproved, undocumented, or underpriced change orders are one of the leading causes of construction project losses. Contractors who do the work first and try to collect later — or who absorb change order costs to maintain the relationship — routinely finish profitable-looking projects at a loss. Every change order should be documented in writing, priced at full cost plus margin, and approved before work begins.
A general contractor completed $180K in change order work on a $1.2M commercial project without written approvals — relying on verbal agreements with the project manager. When the project owner disputed $120K of the change orders at closeout, the contractor had no documentation to support their claim. They ultimately settled for $60K, turning a profitable project into a break-even one.
Lien Waiver
A document that waives a contractor's right to file a mechanic's lien in exchange for payment
A lien waiver is a legal document in which a contractor, subcontractor, or supplier waives their right to file a mechanic's lien against a property in exchange for payment. Conditional lien waivers are effective only upon receipt of payment; unconditional lien waivers are effective immediately upon signing, regardless of whether payment has been received. Lien waivers are standard practice in construction and are typically exchanged with each progress payment.
Signing an unconditional lien waiver before receiving payment is one of the most common and costly mistakes in construction. Once signed, the contractor has permanently waived their lien rights for that payment — even if the check bounces or payment never arrives. Always use conditional lien waivers until payment has cleared.
Equipment Depreciation
The allocation of equipment cost over its useful life for tax and financial reporting
Equipment depreciation is the process of allocating the cost of a piece of equipment over its useful life for accounting and tax purposes. For financial reporting, depreciation is typically calculated using the straight-line method (equal amounts each year). For tax purposes, contractors can often use accelerated depreciation methods — including Section 179 expensing (immediate deduction up to $1.16M in 2023) and bonus depreciation (80% in 2023, phasing down annually).
Equipment depreciation has a significant impact on both tax liability and job costing. On the tax side, timing large equipment purchases to maximize Section 179 and bonus depreciation can reduce taxable income by hundreds of thousands of dollars. On the job costing side, failing to include an equipment depreciation charge in job costs will make jobs appear more profitable than they are — and lead to underpricing.
In construction, bonding refers to surety bonds — financial guarantees that a contractor will fulfill their contractual obligations. The most common types are bid bonds (guaranteeing the contractor will honor their bid), performance bonds (guaranteeing project completion), and payment bonds (guaranteeing payment to subcontractors and suppliers). Insurance covers liability, workers' compensation, equipment, and builder's risk. Both are typically required by project owners and lenders.
Bonding capacity is a ceiling on how much work a contractor can take on. A surety company will typically bond a contractor for 10–15x their working capital — meaning a contractor with $200K in working capital can bond approximately $2–3M in work. Growing beyond that ceiling requires building working capital, improving financial statements, and establishing a track record with the surety.
Subcontractor Management
The financial and operational oversight of subcontractors on a construction project
Subcontractor management encompasses the financial controls, documentation, and oversight processes a general contractor uses to manage subcontractors — including contract execution, insurance and license verification, lien waiver collection, payment processing, and performance monitoring. From a financial perspective, the key risk is paying subcontractors before collecting from the owner, or paying without proper lien waiver documentation.
Subcontractor costs typically represent 40–70% of a general contractor's revenue. Poor subcontractor financial management — paying too early, without documentation, or without verifying insurance — is one of the most common sources of construction losses, disputes, and liability exposure. A systematic approach to subcontractor financial management is a hallmark of operationally mature contractors.
A general contractor paid a framing subcontractor $180K in progress payments without collecting lien waivers. When the subcontractor failed to pay their lumber supplier, the supplier filed a mechanic's lien against the property. The GC was forced to pay the supplier $42K a second time to clear the lien — a cost that came directly out of their profit margin.
Punch List & Final Billing
The financial process of closing out a construction project and collecting final payment
A punch list is a list of incomplete or defective items that must be resolved before a project is considered substantially complete and final payment (including retainage) is released. From an accounting perspective, punch list management is critical because retainage — often 5–10% of the contract value — is typically held until punch list completion. Delays in punch list resolution directly delay cash collection.
Many contractors are so focused on starting new projects that they neglect the financial closeout of completed ones. Retainage sitting in completed projects is cash that belongs to the contractor but isn't being collected. On a $5M annual revenue contractor with 10% retainage, $500K in retainage may be outstanding at any given time — representing a massive, often untracked working capital drain.
A commercial contractor had $340K in outstanding retainage across 8 completed projects. Most had been 'substantially complete' for 3–6 months, but no one was actively managing the punch list closeout process. After implementing a dedicated punch list tracking system and assigning closeout responsibility, they collected $280K in retainage within 90 days — cash that had been sitting idle for months.
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From bookkeeping to CFO services and tax resolution — see how 406 applies these concepts to your business.
Now That You Know the Terms —
Let's Apply Them to Your Business.
A Business Readiness Review identifies which of these concepts are working in your business, which are missing, and what to build first.
Have a term you'd like us to add? Click "Suggest a Term" and we'll add it to the next update.