The Hidden Tax Bomb for Bonded Contractors – Why Buyers Will Demand a Switch to Percentage of Completion

When it comes to selling a bonded contracting business, most owners are unaware of a looming financial landmine that can catch them off guard at the closing table: the tax bomb caused by the Completed Contract Method (CCM) of accounting. While this method has long been favored by contractors for deferring taxes, it becomes a major red flag in the eyes of sophisticated buyers, and often results in a hard line being drawn around the need to switch to the Percentage of Completion (POC) method during due diligence.

Let’s explore why.

Understanding the Completed Contract Method vs. Percentage of Completion

Completed Contract Method (CCM):

• Recognizes revenue only once a project is fully complete.

• Defers taxable income, which can reduce current-year taxes.

• Often used by smaller contractors as a tax-planning tool.

Percentage of Completion (POC):

• Recognizes revenue as work progresses based on cost-to-cost or other completion metrics.

• Required by sureties for bonding capacity evaluation.

• Provides a clearer picture of a company’s performance and financial health.

Why Buyers Require POC Accounting

Buyers, especially private equity groups, institutional investors, and strategic acquirers demand accurate, predictable financials. Here's why they’ll push for POC:

1. POC Aligns with GAAP and Surety Reporting

Most bonded contractors already produce reviewed financials under GAAP for their sureties, and those are almost always based on POC accounting. So even if internal tax reporting is on a completed contract basis, the “real” numbers that matter to sureties and lenders are based on POC. Buyers view these POC financials as more reliable and representative of ongoing performance.

2. EBITDA Accuracy is Critical

POC gives a much more accurate EBITDA picture. With CCM, revenue and profits can be artificially low or high depending on project timing, causing major distortions in valuation. No buyer wants to overpay based on backloaded earnings that won’t repeat in the future.

3. Tax Risk is a Deal Killer

When a contractor has deferred large amounts of income under CCM, a switch to POC can cause a sudden recognition of taxable income, triggering what’s often referred to as a “tax bomb.” This liability can run into hundreds of thousands or even millions of dollars and can fall either on the seller or the buyer depending on the deal structure.

Buyers don’t want to inherit that liability. So, they’ll often require:

• A switch to POC before closing, or

• A purchase price adjustment to account for the deferred tax, or

• A holdback or escrow to protect against post-closing IRS surprises.

Why This Matters When Preparing for Sale

If you're a contractor using CCM, you should consider making the switch to POC well before going to market. Here’s why:

• It eliminates a red flag during diligence.

• It aligns your financials with buyer expectations and valuation models.

• It avoids price chipping or re-trades during the sale process.

• It prepares you for a clean QoE (Quality of Earnings) report, which will undoubtedly be based on POC accounting.

Conclusion

The Completed Contract Method may save you taxes today, but it could cost you dearly when it’s time to sell. In the M&A world, buyers are focused on clarity, consistency, and predictability, none of which are easily achieved with CCM.

At Golden Shield Business Brokers, we specialize in navigating these complex transitions and helping contractors avoid common pitfalls like the tax bomb. If you’re considering an exit, let us help you strategize early, because the most valuable businesses aren’t just well-run, they’re well-prepared.