HVAC New Construction - Net Working Capital

March 26, 2026

by a searcher from New York University - Leonard N. Stern School of Business in Los Angeles, CA, USA

Quick question for those with new home construction experience. We’re under LOI on an HVAC business with a significant new construction component. The company does not track % of completion, and there’s a fair amount of WIP with partially billed jobs. Any advice on: - How to set a normalized working capital peg in this situation - Ways to account for WIP / underbilling risk without formal tracking - Structuring the true-up to avoid post-close disputes Appreciate any guidance or examples — thanks.

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Reply by a professional
from The University of Texas at Austin in Ann Arbor, MI, USA

Good question. This is one of the trickier areas in HVAC deals with a new construction component. Working capital peg: It sounds like you have some WIP visibility even without formal POC tracking. I'd pull the top jobs by dollar value over the trailing 12 months and build a simple WIP schedule for each: total contract value, costs incurred, billings to date, estimated costs to complete. Do that at a few different month-ends to capture seasonality, then use the trailing 6-12 months of adjusted NWC (including over/under billings) to set a normalized peg. Make sure it reflects what the business needs through a full cycle, not just where it happens to land at close. WIP risk: Without a WIP schedule, you can't tell where the exposure is. The seller may have billed ahead of work completed, meaning you're inheriting jobs where the cash is collected but you still owe the customer work. Or costs to complete may be higher than expected. Job-level detail from their accounting system (even QuickBooks job costing) gets you most of the way there. True-up: Define exactly how WIP, over/under billings, and retainage will be measured in the purchase agreement. Don't just say "GAAP working capital." Vague language is where post-close fights start. Happy to jump on a call if you want to talk through any of this.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

The answer is complex. Depends on any factors including weekly/monthly/annual accounting practice. NWC should be such that seller remains motivated to run the business as normal till closing and buyer does not wind up finishing jobs w/o pay. Going with POC in a small business is a big challenge to convince all parties and to do data analysis (which rarely exists) that other side can understand and agree. I have worked on this many times and have tried to find easy solutions with minimal risk. For example: Think COGS as M+L only. Is L constant every month? Is it paid every month? Are margins constant on jobs? Depending on the answers, one can focus on M as the primary component of inventory. This combined with how labor is paid will help on profit split on unfinished jobs.

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