The 16-line review a GC’s risk manager actually runs when a sub sends private financial statements during prequal. What to look at, what’s a yellow flag, what disqualifies, what’s normal-for-the-trade.
Why this checklist exists
Most subcontractor financial-review content on the internet is ungated only until you scroll past the headline. Pop the page open and it’s a surety broker’s lead magnet. Fill the form, a producer calls you Monday, the “checklist” is six lines deep and ends with “talk to your bonding agent.” The other half of the SERP is generic prequal-software vendors selling a workflow tool with a screenshot of a ratio dashboard. Neither of those is what a GC’s risk manager actually does at 4pm on a Thursday when a sub’s CPA emails over a 38-page financial statement and the bid opens Tuesday.
The actual review is sixteen things, in roughly this order. Confirm the financials aren’t stale. Read the cover letter. Audited, reviewed, or compiled tells you how much weight to put on the rest. Pull the four ratios that move the needle: working capital, current, debt-to-equity, and quick. Look at the gross-margin trend across three years (one bad year is a story; three bad years is a trend). Check backlog against annual revenue (a sub running 4x revenue in backlog is leveraged in a way that hurts on cash). Confirm bonding capacity and read the surety letter for headroom on the schedule of work in progress. Eyeball line-of-credit availability, not the limit, the available balance. Pull DSO and ask why it’s high if it’s high. Check customer concentration; one customer representing 60%+ of revenue is a red flag whether the customer is solid or not. Read the related-party transactions footnote. That’s where the family-business stuff hides. Read the going-concern footnote if it’s there (the auditor’s opinion is the auditor’s opinion). Check the litigation, lien, judgment, and tax-lien disclosures. Confirm key-person life insurance on the principals if the sub is a closely-held shop with one or two people running it.
That’s the review. Sixteen items, 30-60 minutes if the financials are clean, two hours if the disclosures are messy. The trick isn’t the math. Every accountant in America can run a current ratio. The trick is knowing what each number means for a construction subcontractor specifically. A 1.3 current ratio means something different for a steel erector than it does for a SaaS company. A 4-to-1 backlog-to-revenue is normal for a small electrical sub spinning up; on a $40M mechanical it’s a warning. The trade matters, the size matters, the work-in-progress mix matters, and the surety’s view of the sub matters more than any single ratio.
We built this checklist after 15 years personally vetting subcontractor financials at a large federal GC. Not in a clean spreadsheet. In the corner office with a yellow legal pad and the sub’s CFO on speakerphone, asking why DSO went from 52 to 81 days year-over-year and what changed about the relationship with their largest customer. The 16 items on this list are the questions that actually predict whether the sub finishes the job, not the textbook items. Use it during prequal before you let a sub bid above their bonding capacity. Use it again before you sign the subcontract on a project where a default would hurt.
You can run this manually for the next 200 prequal cycles. Or, when you’re ready, Contracts Connected’s Subcontractor Prequal feature pre-fills the analysis from the financials the sub has already uploaded, flags ratios that fall outside trade-typical ranges, cross-checks bonding capacity against the surety carrier’s A.M. Best rating, and surfaces stale financials before they reach a contracts admin.
Who uses this
- Mid-market and large general contractors prequalifying subs at financial-review depth before subcontract award
- Federal prime contractors who need financial-statement review on top of the federal subcontractor prequalification questionnaire
- Risk managers running sub financial reviews against working-capital, bonding, and concentration thresholds
- Contracts administrators building the prequal evidence file for surety, lender, and audit review
- CFOs and controllers at GCs who own the sub default-loss line on the P&L
- Compliance officers responding to owner or lender requests for sub financial-vetting documentation
If you’re the sub being asked to send your financials, work through the federal subcontractor prequalification questionnaire first to confirm your set-aside status, NAICS, and bonding letter are current before responding.
What’s included. 16 lines, audited / reviewed / compiled
The checklist covers 16 line items the prime’s risk manager runs against every set of sub-submitted private financials before subcontract award:
- Confirm financials are recent. Within the last 12 months. Stale financials are the most common red flag and the easiest to miss because subs send what they have on file rather than what’s current. Anything older than 12 months gets sent back; anything older than 18 months disqualifies until refreshed. Note the fiscal year-end and confirm the statements cover a full year, not an interim period unless an interim was specifically requested.
- Read the cover letter. Audited, reviewed, or compiled. The CPA firm states the engagement level on page one. Audited is the highest assurance. The CPA tested controls and balances and issues an opinion. Reviewed is middle. Analytical procedures and inquiry, no opinion. Compiled is the lowest. The CPA assembled the numbers from the sub’s books with no testing at all. A compilation on a $50M sub is a yellow flag; the prime should ask for at minimum a review-level engagement on subs above a meaningful subcontract threshold.
- Bonding capacity letter from the surety. Single-job and aggregate. The sub’s surety issues a capacity letter on letterhead stating maximum single-job bond size and maximum aggregate bond capacity across all open work. Confirm the letter is dated within 90 days, signed by an authorized agent at the surety carrier, and that the carrier itself is rated A-VIII or better at A.M. Best. A capacity letter from a sub-A surety has the same value as no letter at all on most federal and institutional projects.
- Working capital. Current assets minus current liabilities. Working capital is the absolute-dollar buffer the sub has between bills coming due and cash available to pay them. The surety’s underwriting standard is roughly 10x working capital as the maximum single-job bond. A sub with $500K working capital should not be bonding a $10M scope without subordination, parent guarantees, or collateral. Compare the working capital number to the size of the subcontract being awarded.
- Current ratio. Current assets / current liabilities. Current ratio is the working-capital buffer expressed as a multiple. 1.0 means current assets exactly cover current liabilities; under 1.0 means the sub is technically insolvent on a current basis. Construction sub-trade norms run 1.3 to 1.8. Under 1.2 is a yellow flag, under 1.0 is a red flag, anything above 2.5 deserves a second look (the sub may be sitting on cash they should be deploying, or AR may be carrying old balances).
- Quick ratio, (current assets minus inventory minus underbillings) / current liabilities. Quick ratio strips out the inventory and the underbillings line, the two pieces of current assets that don’t convert to cash quickly. For a contractor, underbillings (costs in excess of billings) is the line that matters; an underbilled sub is essentially financing the project out of pocket. A quick ratio of 1.0 or better is what the surety wants to see. Under 0.8 is a yellow flag and a question to ask the CFO.
- Debt-to-equity ratio. Total liabilities / equity. Debt-to-equity quantifies how leveraged the sub is. Construction sub-trade norms run 1.5 to 3.0 depending on equipment intensity (a steel erector with a fleet runs higher than a low-voltage sub running a service truck). Above 4.0 is a yellow flag. Above 6.0 is a red flag. The sub is highly leveraged and a single project default could trigger a covenant break or surety pull. Track year-over-year direction; debt-to-equity rising from 2.5 to 3.8 over three years is the trend, not the absolute number.
- Gross-margin trend. Three-year direction. Gross margin (gross profit / revenue) tells you whether the sub is winning work at a price that covers field costs. One bad year is a story (a job blew up). Three years of declining gross margin is a trend. The sub is buying revenue at a price that won’t cover their cost structure, and the cash gap is being papered over with line-of-credit draws and deferred payables. If gross margin is dropping while revenue is rising, ask the CFO what changed in the bidding process and how they’re going to recover.
- Backlog vs annual revenue ratio. Work-in-progress at year-end / trailing-12 revenue. A sub running 1x to 1.5x revenue in backlog is in normal range. A sub running 3x or more is leveraged on a different axis. They have to scale up field crews, supervision, and working-capital draw to deliver the backlog, and any timing slip on a major project starves cash. Backlog is also where bid quality goes to die; a hungry sub that bid 4x revenue at thin margins is a sub that defaults on the unprofitable jobs first.
- Surety capacity headroom. Capacity minus bonded backlog. Take the aggregate bonding capacity from the surety letter and subtract the sub’s currently-bonded work-in-progress. The remainder is what the sub has available for new bonded scopes. A sub with $20M aggregate capacity and $19.5M of bonded backlog has $500K of headroom. If you’re bonding a $5M scope, the surety is going to require capacity expansion before issuing the bond, and capacity expansion takes 60-90 days at most carriers. Check headroom before you assume the bond will issue on schedule.
- Line-of-credit availability. Limit, drawn, available. Pull the LOC line from the financials or the supplemental schedule and confirm three numbers: the facility limit, the current drawn balance, and the available balance. The available balance is what matters during a cash-flow crunch on the project. A $5M LOC with $4.8M drawn has $200K of cushion. The sub is one slow-pay cycle away from a covenant breach. Also confirm the LOC’s renewal date; an LOC up for renewal in 60 days adds risk on top of risk.
- Days sales outstanding (DSO). AR / (revenue / 365). DSO is the average number of days between billing and collection. Construction sub-trade norms run 50 to 75 days depending on the customer mix (private commercial collects faster than federal or municipal). A DSO above 90 means the sub is financing 90 days of payroll, materials, and subcontractor pass-throughs out of working capital. That’s a cash-flow constraint that will surface on your project if a different customer slow-pays them. Year-over-year direction matters more than the absolute number; DSO climbing from 55 to 78 is the question to ask.
- Single-largest-customer concentration. Top customer revenue / total revenue. Concentration is the percentage of total revenue coming from the sub’s single largest customer. Above 30% is a yellow flag; above 50% is a red flag whether the customer is solid or not. The risk isn’t that the customer is bad. The risk is that if the relationship ends (a project ends, a key contact leaves, a competitive bid wins) the sub’s cash flow contracts faster than they can replace it. Ask the sub to disclose top-three customer revenue percentages and verify against the AR aging schedule.
- Related-party transactions footnote. Affiliate sales, leases, loans. The related-party footnote is where the family-business mechanics hide. Office space leased from a principal’s holding company at above-market rent. Equipment leased from an affiliate at non-arms-length pricing. Inter-company loans that show up as long-term debt on one entity and a receivable on the other. None of these are inherently disqualifying, but the prime has to understand them. A sub paying $300K/year above-market rent to a principal-owned LLC has $300K less to pay subcontractors when the project goes long. Read the footnote and ask the CFO to walk through any flagged items.
- Going-concern footnote, litigation, liens, prior bankruptcies, tax liens. Read the going-concern footnote if there is one. The auditor’s opinion that the entity will continue operating for the next 12 months is what’s at stake, and a “substantial doubt” qualifier is a hard stop until resolved. Cross-check the litigation footnote against PACER and the relevant state court systems for active suits not disclosed. Run a UCC and tax-lien search at the state level for unsecured creditor filings. Confirm no prior bankruptcy of the entity or any principal in the past 7 years; prior-bankruptcy disclosure is not automatically disqualifying but it’s a CFO conversation before subcontract award, not a discovery during default.
- Key-person and life-insurance coverage on principals. Closely-held subs with one or two principals running the company carry key-person risk that the financials don’t quantify directly. Ask whether the company carries key-person life insurance on the principals at a level adequate to fund a transition, and whether buy-sell agreements are in place between the principals. A two-principal mechanical sub with no key-person insurance and no buy-sell is one heart attack away from a project default. This isn’t a financial-ratio question; it’s a structural-risk question that belongs in financial vetting because it determines whether the entity continues to exist if a principal exits.
How to use the checklist
Run this checklist during prequal, before any subcontract package goes out on a project where a default would hurt. For each new sub:
- Request the sub’s most recent annual financial statements (audited preferred, reviewed acceptable, compiled with prime-side review). Set a 7-day SLA for return.
- Request the surety capacity letter dated within 90 days, on surety letterhead, signed by an authorized agent. Confirm the surety’s A.M. Best rating against ambest.com.
- Work down the 16 items in order for one sub at a time. Don’t multitask across subs. You’ll miss footnote items.
- Mark each item: OK, Yellow flag, ask the CFO, or Red flag, disqualify until resolved.
- Yellow flags get a 30-minute call with the sub’s CFO. Walk through the specific items, document the answers in the prequal file, and decide whether to proceed, condition (parent guarantee, collateral, capped subcontract value), or pass.
- Red flags stop the prequal at this stage. Either the sub addresses the issue (refreshed financials, surety capacity expansion, bankruptcy resolution) and re-submits, or the sub is passed for this project.
- File the completed checklist alongside the sub’s financials and verification screenshots in the project’s contracts folder. If a default happens later, this is the artifact that proves the prime exercised diligence.
The full PDF download includes a printable cover sheet you can clip to the front of each sub’s financial-statement package, the working Excel checklist with auto-calculated compliance percentage across the 16 items, and the editable Word version for marking up specific subs.
Stop guessing whether a sub can finish the job.
The 16 items above take a contracts admin or risk manager 30-60 minutes per sub when financials are clean, and 3-4 hours when ratios fall outside trade-typical ranges, the surety letter is stale, the going-concern footnote is buried, or related-party transactions have to be unwound from the schedule. Multiply by 30+ subs across a portfolio of active projects and financial vetting becomes a part-time job for a senior risk manager. Contracts Connected’s Subcontractor Prequal feature pre-fills the financial-vetting analysis from the financials the sub has already uploaded, flags ratios that fall outside trade-typical ranges (working capital, current, debt-to-equity, DSO, concentration, backlog-to-revenue), cross-checks bonding capacity against the surety carrier’s A.M. Best rating, surfaces stale financials before they reach the contracts admin, and reads the going-concern, litigation, and related-party footnotes for the disclosures that disqualify before they show up during a default.
For educational purposes. These templates, checklists, and trackers are operator-built starting points designed to help you move faster on the kind of work that usually drowns construction admins in email chains. They are not legal, insurance, accounting, or tax advice. Each project, jurisdiction, and contract has its own quirks. Review the document, refine the language, and consult your attorney, broker, CPA, or compliance officer before relying on it for a live project decision.
Frequently asked questions about subcontractor financial vetting
What’s the difference between audited, reviewed, and compiled financial statements?
Audited financials are the highest assurance level. The CPA firm tests controls and account balances, examines supporting documentation, and issues an opinion on whether the statements are fairly presented. Reviewed financials are middle assurance. The CPA performs analytical procedures and inquiry but doesn’t test balances; no opinion is issued, just limited assurance. Compiled financials are the lowest. The CPA assembles the numbers from the sub’s books with no testing or assurance at all. For prequal purposes, audited is the gold standard, reviewed is acceptable for most subcontract values, and compiled should be supplemented with the prime’s own review or a parent-company guarantee if the subcontract value is meaningful.
What working-capital ratio do sureties want to see for construction subcontractors?
Sureties typically underwrite roughly 10x working capital as the maximum single-job bond size, and 15-20x working capital as aggregate bond capacity. So a sub with $1M working capital can usually bond a $10M single job and roughly $15-20M aggregate. Current-ratio norms for construction subs run 1.3 to 1.8 depending on the trade. Equipment-intensive trades run lower because of the larger fixed-asset base and depreciation drag, while service-and-installation trades run higher. Under 1.2 is a yellow flag and a question for the CFO; under 1.0 is a red flag because the sub is technically insolvent on a current basis.
How do I evaluate a sub’s bonding capacity if their surety isn’t a major carrier?
Confirm the surety carrier is rated A-VIII or better at A.M. Best (ambest.com). A-VIII is the federal floor for most agencies and the institutional floor for most private owners. A capacity letter from a B-rated surety on a federal project will fail prequal regardless of the dollar amount. If the sub’s surety is below A-VIII, the conversation is whether the sub can move to a higher-rated carrier before subcontract award, not whether to accept the lower-rated carrier. Capacity letters from B-rated and unrated sureties are common in the small-commercial space but don’t translate to federal or institutional work.
What’s a normal backlog-to-revenue ratio for a construction subcontractor?
Normal range is roughly 1x to 1.5x trailing-12 revenue. A sub running below 0.5x has weak forward visibility and may be bidding aggressively to fill the schedule. A sub running 2x or higher is leveraged on operations. They need to scale field crews, supervision, working capital, and surety capacity to deliver the backlog, and any timing slip starves cash. The number itself matters less than the trend and the mix; backlog growing 30% year-over-year while gross margin is declining is a worse signal than a higher absolute backlog with stable margins. Ask the sub to break backlog down by project size, customer type, and expected completion date.
How concentrated can a sub be on a single customer before it’s a problem?
Above 30% revenue from a single customer is a yellow flag. Above 50% is a red flag. The risk isn’t that the customer is bad. The risk is the relationship-end scenario. If the customer’s project ends, a key contact leaves, a competitive bid wins, or the customer pulls work in-house, the sub’s cash flow contracts faster than they can replace it. Concentration risk is also why subs with one big institutional customer can look financially strong on paper and fail spectacularly when the customer relationship turns. Ask for top-three customer concentration, not just top-one.
What disclosures in the footnotes actually disqualify a sub?
Hard disqualifiers: a “substantial doubt about ability to continue as a going concern” footnote from the auditor (until resolved with refreshed financials), an undisclosed material litigation matter discovered through PACER cross-check, undisclosed prior bankruptcy of the entity or a principal in the past 7 years, an unsatisfied tax lien at the federal or state level, or a related-party transaction footnote showing material above-market payments to principal-owned entities (without parent guarantee compensating). Yellow-flag disclosures that need a CFO conversation: minor litigation, settled prior tax liens, declining gross-margin trend over 3+ years, customer concentration above 50%, key-person risk with no insurance or buy-sell agreement. The pattern matters more than any single item.