The Hidden Risk in Buying a Half-Built Construction Project

An active construction project is the most mispriced asset on most M&A balance sheets, and buyers keep learning that at close. A half-finished job isn't a fixed line item you can drop into a working capital schedule. It's a live contract, a moving cost curve, a stack of lien rights, and a schedule other people control. Diligence teams that treat it like inventory, or like a finished asset, miss where the real risk sits: in the paper trail and the priority stack behind the drywall.

The pattern below shows up over and over in construction-heavy deals. Each assumption looks reasonable in a data room. Each one bleeds cash the week after signing.

The WIP Schedule Is Not a Financial Statement

Buyers routinely read the work-in-progress schedule as a summary of project health when it isn't one. It's a set of accounting choices about how to recognize revenue on jobs that are still being built, and those choices tend to tilt in whichever direction the seller finds convenient going into a process.

Front-loaded billings inflate current earnings by pulling recognition ahead of the work actually performed. Underestimated cost-to-complete hides losses that are already baked into a job, even though the schedule still shows a healthy margin. A serious WIP audit reconciles the schedule against subcontractor commitments, change order logs, and actual field progress — and doing that work can move a target's stated position by real money, not a rounding error.

Ask for the last four quarters of WIP snapshots side by side. Then track how estimates to complete changed on the same jobs, quarter over quarter. When the numbers keep drifting the wrong way, that's profit fade, and it says more about the seller's estimating discipline than any pitch deck will.

Lien Priority Doesn't Care When You Closed

The most common lender assumption is that a recorded mortgage or a perfected security interest sits ahead of unpaid trades. On an active project, that assumption is often wrong. Mechanic's lien rules vary widely by jurisdiction, and in many places a lien for work or materials relates back to the date construction first commenced on the site, not the date the lien was actually filed.

A claimant who shows up after closing can still leapfrog a construction loan that was recorded months earlier, simply because the underlying work started before that loan was ever put on record.

Two practical implications follow for buyers and lenders, and a third sits underneath both of them:

• Unconditional lien waivers. Collect current, signed waivers from every tier of subs and suppliers through the last pay application, not just the general contractor's certification.
• Estoppel certificates. Get contractor and major-sub estoppels confirming amounts owed, pending change orders, and any claims in dispute as of the closing date.
• Title endorsements. Price the deal assuming you'll need date-down endorsements and mechanic's lien coverage, and read the exceptions carefully.

Contract Terms Set the Ceiling on Recovery

Diligence checklists tend to treat construction contracts as background documents to be filed rather than read closely. They're the deal. Liquidated damages caps, mutual waivers of consequential damages, notice-of-claim windows, and limitations of liability decide what a delay is actually worth once litigation starts — regardless of what the delay looks like on a schedule.

A long delay on a project with a tight LD cap and a consequential damages waiver is a very different asset than the exact same delay sitting inside an uncapped contract. The gross exposure on paper and the exposure a buyer can actually recover can be worlds apart.

This is where a construction attorney earns their keep during diligence, well before any dispute materializes. Have counsel read every active prime contract and the material subcontracts, flag the recovery ceilings in each one, and price the deal to those ceilings rather than to the gross exposure a delay might suggest on its face.

None of this argues for walking away from construction-heavy targets. It argues for reading the WIP schedule as an accounting document, the lien landscape as a priority problem that doesn't respect the closing date, and the contracts as the actual cap on what a bad outcome will cost. Buyers who price to those three things going in are the ones who aren't surprised the week after signing.