Evaluating a project-based business that uses percentage of completion (PoC) accounting requires more than reviewing reported revenue and EBITDA. Buyers must understand whether the financial statements accurately reflect the economics of ongoing work.
Structuring Financial Diligence for PoC Companies
inancial diligence for PoC businesses requires a more focused approach than traditional revenue models. Reported results are influenced by estimates, timing and project-level variability, meaning standard analyses may not fully capture risk.
Diligence must assess how results are generated and whether they are sustainable. This typically involves assessing normalized performance, revenue recognition practices, working capital and post-closing operational considerations.
The lookback analysis in practice
The standard tool used by quality of earnings (QoE) providers to address PoC timing issues is the lookback or hindsight analysis. This procedure replaces estimated costs with actual final costs and recalculates margins across the life of each project, smoothing out timing differences created by estimates.
What the lookback reveals: The lookback removes noise created by estimate-driven timing differences, produces a cleaner view of historical performance and reduces the volatility introduced by the cost estimation process.
What the lookback misses: The limitation is that it removes more than noise. It also removes information about how the business performs. Variability in project margins driven by estimate revisions, cost overruns and execution issues are part of the operating reality. A company that consistently overestimates early-stage job profitability is not equivalent to one that estimates conservatively and performs to plan, even if the lookback produces similar adjusted EBITDA.
