Nobody wants to waste resources on a bad subcontractor hire. With every new hire, there’s worry about incomplete work, payment problems, or job site delays.
This article will explain the key financial metrics in the construction industry that help you decide if a subcontractor is stable and reliable. Here are the eight metrics that show whether a sub is financially ready.
Financial Metrics for Evaluating Construction Subcontractors
You can’t judge a subcontractor’s financial health by looking at their trucks or headcount. Numbers tell the real story. Here are a few essential metrics that clearly show how well a subcontractor can manage overhead costs and cash.
Current Ratio
The current ratio shows whether subcontractors can pay off their short-term debts using their assets. It’s one of the most important financial ratios for contractors. As of 2023, publicly listed U.S. construction companies reported a median current ratio of 1.45.
A ratio above 1.0 means the subcontractor should be able to pay their bills and keep operations running. A ratio below 1.0 could signal cash flow trouble. Most construction experts recommend a ratio of at least 1.0 to 1.3. A ratio above 1.3 is generally safer and can be a sign of a well-managed operation.
The current ratio also hints at how subcontractors manage job costs and scheduling. If their ratio is too high (say above 2.0), it could mean they’re holding onto too many idle assets or not reinvesting in projects. That’s a red flag for underperformance or missed growth opportunities.
Formula:
Current Ratio = Current Assets / Current Liabilities
If a subcontractor has $200,000 in current assets and $120,000 in current liabilities:
Current Ratio = 200,000 / 120,000 = 1.67
Working Capital
Working capital shows the difference between what a subcontractor owns short-term (current assets) and what they owe short-term (current liabilities). It tells you if they have enough money to run daily operations and take on new jobs.
You can also look at working capital turnover, which shows how efficiently a subcontractor uses that working capital to generate revenue.
In 2020, contractors with less than $50 million in annual revenue had an average working capital turnover of 6.8. Larger firms averaged 13.6. These numbers give you a benchmark to compare against when reviewing a subcontractor’s books.
Formula:
Working Capital = Current Assets – Current Liabilities
If a subcontractor has $250,000 in current assets and $180,000 in current liabilities:
Working Capital = 250,000 – 180,000 = $70,000
The working capital turnover formula is:
Working Capital Turnover = Revenue ÷ Working Capital
Debt-to-Equity Ratio
The debt-to-equity ratio shows how much a subcontractor relies on debt versus their own money (equity) to finance the business.
A ratio of 1.5 means the company uses $1.50 of debt for every $1.00 of its own equity. This isn’t always bad—some debt can help fund growth. However, too much debt raises concerns about whether they can handle tough months or unexpected project issues. For U.S.-listed construction firms, the average debt-to-equity ratio in 2023 was 1.42.
In construction, debt often comes from equipment financing, credit lines for materials, or loans to cover payroll. So, this ratio tells you how much risk the subcontractor is carrying.
Formula:
Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity
If a subcontractor has $600,000 in total liabilities and $400,000 in equity:
Debt-to-Equity Ratio = 600,000 ÷ 400,000 = 1.5
Accounts Payable Turnover
Accounts payable turnover shows how often subcontractors pay off their suppliers and vendors during a specific period—usually a year.
A turnover ratio between 8 and 10 is considered healthy in many industries, but construction businesses should compare themselves with companies of similar size and project types. A small subcontractor working on custom homes will have different benchmarks than a commercial framing crew working on large builds.
Formula:
Accounts Payable Turnover = Cost of Goods Sold (or Total Purchases) ÷ Average Accounts Payable
Where:
- Cost of Goods Sold (COGS) or Total Purchases: This is the total amount the subcontractor spent on materials, labor, and subcontracted services during a period—usually one year.
- Average Accounts Payable: This is the average amount the subcontractor owed to vendors during that same time. You calculate it by adding the period’s beginning and ending accounts payable and dividing by 2.
If a subcontractor has $1,000,000 in material and labor costs over the year and their average accounts payable is $125,000:
Accounts Payable Turnover = 1,000,000 / 125,000 = 8
Accounts Receivable Turnover
Accounts receivable turnover shows how quickly subcontractors collect payment from clients after billing them. This key performance indicator helps you understand their cash flow and how reliable their clients are at paying.
In 2023, the industry average was about 60 days. If the turnover is too low (or the DSO is too high), it may mean they’re slow to collect, possibly due to weak invoicing systems or poor client follow-up. That can tie up cash and create project delays.
Slow accounts receivable collection processes can lead to cash being tied up for months, especially if the sub works with slow-paying GCs.
Formula:
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Where:
- Net Credit Sales: Total sales made on credit (not cash) during a period.
- Average Accounts Receivable: The average amount owed by clients. (Beginning A/R + Ending A/R) ÷ 2
You can also convert it into days (known as Days Sales Outstanding or DSO) using:
DSO = 365 ÷ Accounts Receivable Turnover
If a construction company made $1,200,000 in credit sales and had an average accounts receivable of $200,000:
Accounts Receivable Turnover = 1,200,000 ÷ 200,000 = 6
Now, to find how many days it takes to collect:
DSO = 365 ÷ 6 = about 61 days
Profit Margin (Net and Gross)
Profit margins show how much money a subcontractor keeps after covering costs. The gross profit margin looks at profit after direct job costs. The net profit margin shows what’s left after all expenses, including overhead and taxes.
According to the National Association of Home Builders (NAHB), in 2020:
- The average gross profit margin was 18.2%
- The average net profit margin was 7.0%
Other data shows that gross margins can range from 20% to 24%, depending on location, job type, and company size.
Subs with consistent profit margins are likely doing solid financial planning with CPM software that tracks project data in real-time.
Formulas:
Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue × 100
Net Profit Margin = Net Profit ÷ Revenue × 100
A construction company earns $1,000,000 in revenue and spends $800,000 on direct job costs:
Gross Profit = 1,000,000 – 800,000 = $200,000
Gross Profit Margin = 200,000 ÷ 1,000,000 × 100 = 20%
If their total net profit after overhead, insurance, and taxes is $70,000:
Net Profit Margin = 70,000 ÷ 1,000,000 × 100 = 7%
Work-in-Progress (WIP) Reports
A Work-in-Progress (WIP) report tracks the financial status of ongoing jobs. It shows project managers what’s been billed and earned and whether each project is over or under budget.
WIP reports help with projecting financial performance over time, showing you whether jobs are trending on a budget or slipping.
Key parts of a WIP report include:
- Contract value
- Project costs to date
- Billings to date
- Earned revenue
WIP reports help you spot if a subcontractor stays on budget and bills correctly. For example:
- Overbilled: They’ve invoiced more than the work completed. This could mean good cash flow—but if it’s excessive, it might hide delays.
- Underbilled: They’ve done the work but haven’t billed yet. This can signal poor cash flow or weak billing practices.
Construction CPM tools like Anterra can automate WIP reporting and provide real-time visibility into earned vs. billed revenue. Monitoring financial risks with real-time dashboards lets you catch underbilling, overbilling, and margin fade while the job is still in progress.
Return on Assets
Return on Assets (ROA) measures how efficiently subcontractors use their assets—equipment, vehicles, tools, and property—to generate profit. It tells you how much profit they make for every dollar tied up in assets.
A higher ROA means the subcontractor uses their equipment and resources efficiently to make money. A lower ROA could mean their assets are underused or they’re not earning enough to justify the cost of what they own.
In 2020:
- The average ROA for U.S. construction firms was 10.9%
- Firms with under $50 million in revenue averaged 12.2%
- Larger firms (over $50 million) averaged 9.2%
Formula:
ROA = Net Income ÷ Total Assets × 100
Example:
If a subcontractor earns $250,000 in net income and owns $2,000,000 in total assets:
ROA = 250,000 ÷ 2,000,000 × 100 = 12.5%
Red Flags to Watch Out for in Financial Statements
A solid financial report can’t fix poor billing habits, stretched crews, or sloppy job management. This section looks at the subtle (and not-so-subtle) red flags in the financial statements of subcontractors that could point to deeper problems.
No Recent WIP or Financial Reports
If a subcontractor can’t provide up-to-date Work-in-Progress (WIP) reports or basic financial statements, that’s a major red flag. It usually means one of two things: they’re not tracking project performance closely or hiding financial trouble.
Without regular reports, it’s hard to tell if a subcontractor stays on budget, manages cash flow, or keeps projects on schedule.
Reliable subcontractors should be able to provide:
- Monthly or quarterly WIP reports
- Basic financials (balance sheet, income statement, cash flow)
- Job costing breakdowns
A survey found that 30% of construction firms said over half of their data was inaccurate or delayed.
Negative Working Capital
Negative working capital means a subcontractor’s current liabilities exceed their current assets. Simply put, they owe more in the short term than they have on hand. And that puts your project at risk. If the working capital is negative, the subcontractor may struggle to:
- Pay suppliers on time
- Make payroll
- Buy materials
- Handle change orders or delays
Current Ratio Below 1.0
A current ratio below 1.0 means the subcontractor doesn’t have enough short-term assets—like cash, receivables, or inventory to cover short-term debts.
If a subcontractor is under that, ask why and how they plan to manage short-term costs.
Irregular or Negative Cash Flow
If a subcontractor has irregular or negative cash flow, money isn’t coming in consistently, or worse, they’re spending more than they’re bringing in.
Jobs get held up fast when subs can’t buy materials or pay their crew. And if a subcontractor relies on your next payment to finish the current work, you’re in a bad spot.
Here’s what to watch for:
- No cash flow statement provided
- Delayed payments to suppliers or workers
- Overreliance on upfront deposits to stay afloat
If a sub isn’t forecasting cash flow across upcoming jobs, it’s easy for small gaps to turn into major project disruptions.
How to Gather and Analyze Financial Data
You can’t rely on gut feeling or reputation alone when choosing subcontractors. A company might look busy and professional on the surface, but behind the scenes, it could be drowning in debt.
Start by requesting the right documents. At a minimum, ask for:
- Balance sheet
- Income statement
- Cash flow statement
- Recent Work-in-Progress (WIP) report
- Accounts receivable/payable aging reports.
Use a standardized checklist that includes financial metrics, safety records, bonding capacity, insurance coverage, licensing, and references.
Once you get the documents, compare their numbers to industry benchmarks. Also, adjust your expectations based on company size—a smaller firm will have different benchmarks than a large commercial subcontractor.
You must also evaluate external factors affecting a subcontractor’s financial health. Look at their project pipeline, regional market conditions, and seasonal risk.
For a more accurate and efficient analysis, many construction pros use software like Anterra. A CPM platform can pull live financial data and automatically generate WIP and margin reports.
Take Control of Construction Finances with Anterra
If you want to avoid job delays, budget overruns, or hiring the wrong subcontractor, you need to look at the numbers—plain and simple. Construction financial management solutions help you dig deeper into those numbers, giving you better tools to evaluate subs before problems appear on-site.
Anterra gives you the tools to do this without the hassle. You get clear reports on operating costs, billing, cash flow, and WIP—all in real time. No guesswork. No outdated spreadsheets.
See your project numbers clearly. Get a free demo today.
FAQs
How often should I evaluate my subcontractors’ financial health?
You should evaluate financials before awarding a new contract and then at least once a year for ongoing partners.
What’s the difference between bonding capacity and financial strength?
The bonding capacity shows how much work a surety believes the subcontractor can handle at one time. Financial strength reflects the actual financial performance of the business. A sub might be bondable but still have poor cash flow or weak margins, so both need to be reviewed.
Can a subcontractor be too financially conservative?
Yes. If a subcontractor shows excessively high liquidity or unusually low debt, they might avoid growth or reinvesting in equipment and staff.