Service work and new construction are two different businesses

Plenty of electrical contractors run both. Same trucks, same crew, same licence — so it feels like one business with two kinds of work.

It is not. They have different margins, different risks, and cash cycles that are weeks apart. Run them through one set of books and the company total will average them into a number that describes neither.

The cash cycle is the whole difference

Service work is billed on completion and often paid on the spot or within a fortnight. Small jobs, fast money, low risk on any single one.

New construction is billed on progress, paid on a schedule that depends on the general contractor's own draw, with a percentage held back as retainage until the whole project is signed off. The work is done, the money arrives months later, and part of it arrives much later than that.

Both can be perfectly good business. But construction consumes cash while it earns profit, and service generates cash while it earns less of it. A company doing more construction each year can be growing, profitable and running out of money at the same time — and the P&L will show none of that.

What one set of books hides

Which side is actually carrying the company. If service runs at 45% gross margin and construction at 22%, a blended 33% tells you nothing useful. You cannot price, quote or hire against an average of two different businesses.

That construction is being funded by service. This is the common and dangerous one. Service collects fast, so its cash pays for the materials and payroll on construction jobs whose money has not arrived. It works, invisibly, until service slows for a month — at which point the construction jobs still need funding and there is nothing to fund them with.

How much money is tied up in retainage. Retainage accumulates across every job. It is earned, it is contractually yours, and it is frequently the single largest block of what you are owed. Buried inside ordinary accounts receivable it looks like a collections problem, so people chase it — pointlessly, because it is not late, it is held.

The split that fixes it

Four changes, none of them large:

1. Separate revenue accounts — service, and new construction. Not one Sales line.
2. Separate direct cost accounts underneath each, so labour and materials attach to the right side.
3. Retainage receivable as its own account, apart from ordinary AR. The chart of accounts puts it at 1150 for exactly this reason.
4. Costs and billings in excess — the over- and underbilling positions on construction jobs, so you can see whether you are financing the customer or the customer is financing you.

That last one is the difference between knowing your margin and finding out at year end. Work in progress explains what it tracks and why it matters on anything running longer than a month.

Two numbers worth having every month

Gross margin on each side, separately. If construction margin is falling while service holds it up, you want to know in month two, not at the year end when the pattern is a year old.

Days sales outstanding on each side, separately — and calculate construction both with and without retainage. One of those figures is a collection performance measure; the other is a contractual reality you cannot chase. Blending them makes both meaningless. DSO covers the calculation.

When to stop doing one of them

Sometimes the honest answer is that the smaller side is not worth its overhead — the estimating time, the compliance, the certified payroll on public work, the cash it locks up.

But that decision cannot be made from a company total, because the total already contains the answer, averaged into invisibility. Split the two, look at margin and cash separately for three months, and the decision usually makes itself.

Related

• Getting paid faster as an electrical contractor
• Retainage explained
• Customer deposits and progress billing
• 13-week cash flow forecast