When a contractor comes in for a line of credit or a bonding increase, the lender's first question isn't about their income statement. It's about what they're currently building.
The WIP schedule — the report that shows the status of every active contract — is one of the most important documents in a contractor's lending relationship. Understanding how lenders use it is the difference between advising a client toward a successful loan and sending them in unprepared.
Why Cash Flow Projections Aren't Enough
Most loan analyses start with cash flow. DSCR — debt service coverage ratio — is the number that gets loans approved or declined. But DSCR is a backward-looking calculation. It uses historical earnings to project the ability to service future debt.
For a contractor, that's only half the story. The other half is what's currently on the WIP schedule, because that's the revenue that's going to flow through the income statement over the next six to twelve months.
A contractor with a strong DSCR from last year and a deteriorating WIP schedule is a credit that's getting weaker, even if the trailing numbers look fine. A contractor with a modest DSCR and a healthy, growing backlog with improving margins is a credit that's getting stronger.
Experienced construction lenders know this. They look at both.
What Lenders Look for in the WIP
Backlog and revenue pipeline. The remaining contract value on the WIP schedule is the most immediate measure of a contractor's pipeline. A contractor with $3 million in remaining backlog has a better near-term revenue story than one burning through their current jobs without new work coming in. Lenders — and especially bonding companies — want to see that the business isn't dependent on landing work it hasn't won yet.
The underbilling position. Large underbillings on the schedule tell a lender two things: first, the contractor is doing work but hasn't billed for it, which is a cash efficiency problem; second, that uncollected revenue is an asset on the balance sheet — but an illiquid one. If a lender is evaluating the collateral value of the contractor's balance sheet, they're going to discount underbillings heavily. It's not the same as cash in the bank.
The overbilling position. Significant overbillings raise a different concern. The contractor has collected cash they haven't yet earned. That can make the cash position look stronger than it actually is. A lender reviewing a contractor's working capital who doesn't understand overbillings may overestimate how much liquidity the business actually has. The overbilling is a liability — work still owed to the customer.
Margin trends. Lenders who know construction look at estimated gross margin by job, not just the average. A WIP schedule where every job is compressing toward lower margins is a forward indicator of a weaker income statement. The P&L may not reflect it for another quarter, but the lender who reads the WIP schedule can see it coming.
Concentration. If one job represents 60% of the contractor's active backlog, that's a concentration risk. If that job stalls, goes into dispute, or gets put on hold, the contractor's cash flow goes with it. Lenders flag this, particularly on revolving credit facilities where the line is being used to fund the working capital gap.
The Line of Credit Conversation
Most contractors fund their day-to-day cash flow with a revolving line of credit. Understanding what the WIP schedule says about the appropriate size of that line — and whether the contractor is using it correctly — is one of the more useful things an advisor can bring to the banking relationship.
A revolving line of credit is supposed to go up and down with the business cycle. Draw it to fund payroll and materials while a job is active; pay it down as billings get collected. A line that just keeps going up is usually a sign that the contractor has an underbilling problem, a margin problem, or both. The line is covering losses, not timing.
If your contractor client's line of credit has been largely maxed out for several consecutive quarters and the justification is always "we're growing" — take a closer look at the WIP schedule. Sometimes that's the answer. More often, the line is covering a working capital leak that growth is making larger.
How to Prepare a Contractor for a Lending Conversation
The lender is going to ask for the WIP schedule. Have it ready before they do. Walk through it with your client first.
Know the answers to these questions before the meeting:
What is the total active backlog, and how does it compare to this time last year?
Are there any jobs on the schedule with significantly compressed or negative margins? If so, what happened, and is the problem contained?
What is the net underbilling or overbilling position, and is it improving or worsening?
Are there any jobs on the schedule with disputes, change orders in process, or collection concerns? A lender asking about a large underbilling on a specific job doesn't want to hear "we're still working through it." They want a timeline.
How much of the backlog is under contract versus verbal or in negotiation? Lenders and bonding companies count signed contracts. Relationships and handshakes don't appear on the schedule.
The contractors who get the best terms on their credit facilities are the ones who show up with clear answers to these questions before they're asked. Lenders make decisions based on information quality as much as information content. A contractor who can walk through their own WIP schedule with confidence — who understands the numbers and can explain the exceptions — is a borrower a lender trusts.
That trust has a direct impact on rate, structure, and how much grace they get when something goes sideways.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to construction and specialty-trade businesses. He works with advisors and CPAs helping their contractor clients prepare for and navigate lending relationships.
jrbohlke.com • The Analysis