$30M Custom Builder — Post-Acquisition Financial Stabilization and Project Accounting

‍The Challenge

Our client acquired a $30M custom ship builder and immediately confronted the financial management complexity that defines project-based marine construction at this scale. Custom shipbuilders carry a uniquely difficult financial profile: every vessel is a standalone profit center with its own budget, timeline, cost structure, and billing schedule. Revenue is earned over months or years of construction activity, costs are incurred across dozens of subcontractors, material suppliers, and specialized marine trades per project, and cash flow timing is governed by milestone payment schedules that rarely align with the pace of actual expenditure.

At $30M in revenue, this builder was constructing multiple custom vessels simultaneously — each with its own specifications, marine systems integration requirements, change order history, and delivery timeline. The financial challenge is that accurate reporting requires the business to know, at any point in time, how much revenue has been earned on each vessel, how much cost has been incurred against the budget, what the estimated cost to complete is, and whether the project is tracking to its original margin or experiencing erosion. Without this project-level visibility, the consolidated financial statements are unreliable — they may show revenue that hasn't been earned, miss costs that have been committed but not yet invoiced, and present a margin picture that doesn't reflect the actual economics of work in progress.

The seller's financial records reflected exactly these problems. Vessels were being tracked inconsistently — some with detailed cost breakdowns by hull, propulsion, electrical, and outfitting phases, others with only aggregate totals that made it impossible to determine where a build stood against its budget. Cumulative revenue recognition was misaligned with actual construction completion status. Balance sheet accounts — particularly accrued expenses, accounts receivable, and work-in-process — had not been reconciled, creating discrepancies between what the financial statements reported and the actual financial position of the business. Intercompany charges between related entities had not been properly allocated or documented.

For a buyer stepping into this environment, the risks are immediate and consequential. Without accurate project-level financials, the buyer cannot determine which vessel contracts are profitable and which are losing money. Without reconciled balance sheet accounts, the buyer cannot trust the reported working capital position. Without a cash flow forecast tied to the milestone payment schedule on active builds, the buyer cannot predict when cash will be available and when shortfalls will occur. The client needed a comprehensive financial stabilization effort — not a one-time cleanup, but a permanent operating infrastructure for project-based financial management in a marine construction environment.

What We Did

We conducted a financial health assessment covering project accounting, revenue recognition, balance sheet integrity, cash flow forecasting, and operational processes. The engagement addressed both the immediate stabilization needs and the long-term infrastructure required to manage a $30M shipbuilding operation with financial discipline.

Estimate at Completion and Revenue Recognition

The central accounting challenge in custom shipbuilding is revenue recognition under ASC 606, specifically the application of the input method to long-duration contracts. Custom vessel construction contracts are typically recognized over time because the asset has no alternative use to the builder (each vessel is built to the buyer's specifications) and the builder has an enforceable right to payment for performance completed to date. The correct approach is to recognize revenue as the performance obligation — construction of the vessel — is satisfied, using a measure of progress that reflects actual work performed.

The Estimate at Completion (EAC) method provides the framework. For each active vessel build, the EAC process requires three inputs: the total contract value (including approved change orders), the total estimated cost to complete the project, and the costs incurred to date. The ratio of costs incurred to total estimated cost produces the percentage of completion, which determines how much of the contract revenue can be recognized in the current period.

The discipline of EAC is in the estimate of cost to complete. This is not a static number set at contract inception — it must be revised each reporting period based on actual cost experience, change order activity, subcontractor pricing updates, material cost fluctuations, and yard conditions. A vessel that was originally budgeted at a 22% margin may be tracking at 16% if marine-grade aluminum or specialized propulsion components came in above estimate, or at 26% if the yard negotiated better subcontractor pricing during execution. The EAC process surfaces these variances in real time rather than allowing them to accumulate undetected until the vessel is delivered.

Shipbuilding introduces EAC complexity that does not exist in simpler construction environments. Vessel contracts frequently include performance specifications — speed, fuel consumption, range, noise levels — that carry financial consequences if not met. Warranty provisions, sea trial costs, and classification society compliance requirements (ABS, Lloyd's, DNV, or USCG certification depending on vessel type and intended use) all represent cost categories that must be estimated and tracked within the EAC framework. If these costs are excluded from the estimate or underestimated, the reported margin on the contract will overstate actual profitability — a problem that only becomes visible when the vessel nears completion and the deferred costs materialize.

The seller had not been performing EAC analysis on a consistent basis. On some vessels, revenue was recognized based on milestone billing rather than actual completion progress — a method that significantly distorts reported revenue when the payment schedule front-loads receipts relative to work performed. On other builds, cost estimates had not been updated to reflect change orders, material price escalation, or scope modifications driven by classification requirements. The percentage of completion calculations were based on stale data.

We rebuilt the EAC schedule for every active vessel. This involved gathering current subcontractor commitments across hull fabrication, mechanical systems, electrical, piping, paint, and outfitting trades; open purchase orders for engines, generators, navigation electronics, and marine hardware; approved and pending change orders; and actual costs incurred to date — then working with the yard's project management team to produce an updated cost-to-complete estimate for each build. The revised EAC schedules produced an adjusted revenue figure for each vessel that reflected actual completion status, and the consolidated financial statements were recast accordingly.

Post-close, we implemented a monthly EAC review process. Each month, project managers update cost-to-complete estimates based on current yard conditions, committed costs, and any specification changes. The accounting team uses these estimates to compute the current-period revenue recognition for each vessel contract. The result is a set of financial statements where reported revenue tracks actual construction progress — not billing activity, not contract signing, not cash receipts.

13-Week Cash Flow Forecast

Cash flow forecasting for a shipbuilder requires a vessel-by-vessel approach. Each contract has its own milestone payment schedule — the contractual timeline on which the builder bills the vessel owner for completed construction milestones — and its own expenditure profile driven by the sequencing of trades, material deliveries, and subcontractor payment terms.

We built a 13-week cash flow model that aggregated the vessel-level cash flows into a consolidated weekly forecast. On the inflow side, we mapped each vessel's upcoming milestone billing submissions against the expected collection timeline — accounting for owner inspection and approval cycles, marine surveyor sign-offs, and lender review processes where construction financing is involved. In shipbuilding, the gap between milestone achievement and cash receipt is often longer than in other construction sectors because of the technical verification requirements — hull inspections, systems testing, classification surveys — that must be completed before a milestone payment is released.

On the outflow side, we captured subcontractor payments for hull fabrication, mechanical installation, electrical, piping, and outfitting crews; material supplier invoices for steel, aluminum, engines, generators, propellers, shafting, electronics, and marine hardware; weekly payroll for yard workers and office staff; insurance premiums (including hull builder's risk coverage); equipment and crane rental; dry dock or marine railway fees; and any debt service on yard facilities or equipment financing.

The model was designed to handle the timing mismatches inherent in shipbuilding cash flow. A builder may need to pay the engine supplier upon delivery to the yard, but the milestone payment that covers propulsion system installation may not be triggered until the engine is installed and tested — a gap of weeks or months depending on the build sequence. Similarly, steel or aluminum for hull fabrication is typically purchased and paid for well in advance of the hull completion milestone that triggers the corresponding owner payment. These gaps create short-term cash deficits that are entirely predictable with a vessel-level cash flow model but invisible without one.

We also incorporated the seasonal and cyclical dimensions specific to marine construction. Yard throughput is affected by weather (particularly for builders operating in open or partially covered facilities), drydock scheduling, and vessel launch windows driven by tidal conditions or waterway access. The model projected how these factors would affect both the timing of milestone achievement (and therefore inflows) and the pacing of expenditure.

Balance Sheet Reconciliation and Audit Readiness

The seller's balance sheet had not been reconciled in a manner that would support accurate financial reporting or withstand audit scrutiny. We performed a comprehensive reconciliation covering accounts receivable (verifying that reported receivables matched actual milestone submissions and confirmed owner or lender obligations), work-in-process inventory (ensuring that costs capitalized to each vessel matched the actual expenditure record and that the WIP balance was consistent with the EAC schedules), accrued expenses (identifying and recording liabilities for subcontractor work performed but not yet invoiced, materials delivered but not yet billed, and payroll obligations incurred but not yet paid), intercompany accounts (reconciling charges between related entities — common in shipbuilding where the yard, a marine services division, and a parts or supply entity may share overhead), and amortization entries (reviewing the treatment of acquisition-related intangible assets including customer relationships, backlog, and trade name, and ensuring amortization schedules were correctly computed and recorded).

This reconciliation process produced a clean opening balance sheet for the new owner — a requirement for reliable ongoing financial reporting and a necessary foundation for any future audit, review engagement, or lender covenant compliance package. We organized the supporting documentation into an audit-ready file structure so that when the business undergoes external review, the documentation is accessible and complete.

Finance SOPs and Financial Process Infrastructure

We established standard operating procedures for the financial functions that drive day-to-day accuracy in a shipbuilding operation: job cost entry (ensuring all costs are coded to the correct vessel and cost category — hull, mechanical, electrical, piping, outfitting, general conditions — at the point of entry), subcontractor payment processing (approval workflow, lien waiver collection where applicable, and payment scheduling aligned to the cash flow forecast), payroll processing (time entry verification by vessel, prevailing wage compliance where required on government contracts, and workers' compensation classification for yard trades), milestone billing preparation (assembling supporting documentation, scheduling owner and surveyor inspections, and submitting draw requests on a consistent timeline), and monthly close (defined calendar with reconciliation, EAC update, revenue recognition, WIP roll-forward, and management reporting milestones).

These procedures transformed the yard's back office from an ad hoc function that produced financial data intermittently into a structured operation that delivers accurate vessel-level and consolidated financials on a monthly cadence.

The Impact

The EAC-based revenue recognition system gave the client accurate vessel-level financial data for the first time since the acquisition. Leadership can now see which builds are on budget, which are experiencing margin erosion from material cost escalation or scope changes, and where change order activity is affecting the financial outcome — in real time, not after the vessel delivers. Quarterly financial statements accurately reflect the earned revenue and margin position of the business, which strengthened credibility with lenders and improved the accuracy of financial covenant reporting.

The 13-week cash flow model eliminated the liquidity surprises that had characterized the post-acquisition period. Milestone billing submissions are now scheduled proactively based on the forecast, subcontractor and supplier payments are timed against expected collections, and seasonal throughput variations are planned rather than reactive. The client has not experienced a funding gap on any active vessel build since the model was implemented.

Balance sheet reconciliation and audit-ready documentation reduced the risk of future audit findings and gave the client a clean financial foundation for ongoing reporting. The intercompany reconciliation resolved allocation issues that had obscured the true profitability of the shipbuilding operation versus related entities.

The operational SOPs reduced administrative errors, accelerated the monthly close, and freed project managers from financial tasks that were consuming time better spent on yard operations and vessel delivery. The business now operates with the financial infrastructure required to manage a $30M+ vessel construction portfolio with discipline — and to scale further through additional contracts or acquisitions without losing financial control.

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