Engineering business valuation

Which kind of engineering business is it?

Engineering covers firms that earn money in very different ways, so the valuation starts by being clear about which one we are looking at. Most fall into four broad groups, and plenty straddle two.

• Consulting and design engineers sell professional hours. Value sits in the people, the client relationships and how much of the engineers' time is billed.
• Contract engineering and maintenance businesses install, maintain and repair plant at client sites: mechanical, electrical and instrumentation work, shutdown crews, breakdown response. Value sits in the contracts and the workforce.
• Precision engineering workshops machine, assemble and repair components to drawings. They behave much like manufacturers, so our manufacturing guide applies, with the added risk of project-style work.
• Design and build of equipment, such as special-purpose machines, conveyors and process skids, combines engineering hours with fabrication and procurement, and carries the heaviest contract risk.

Fabrication-heavy businesses have their own page: see fabrication business valuation. Engineering firms whose main clients are mine sites are covered on our mining services page.

How much of the revenue will still be there next year?

This is the first question a buyer of an engineering firm asks, and the one that moves value most. A three-year maintenance contract on an operating plant and a single large project that finishes in March can produce the same profit this year. Only one of them is likely to be producing it next year.

We split revenue into layers and look at each separately:

A master services agreement or panel appointment is not committed revenue. Most panels let the client call off work without any minimum volume, so we look at what has actually been called off over several years, not the panel's headline value or the number of years it has left to run.

When the revenue mix is shifting, for example a firm moving from projects into maintenance, past earnings may understate or overstate the future, and a forecast-based method may carry more weight. The report says which approach we relied on and why. Our how we value page explains the methods.

Work in progress, contract assets and retentions

Engineering accounts often carry large balances that exist only because of how project revenue is recognised. Under AASB 15 Revenue from Contracts with Customers, revenue on many contracts is recognised over time as the work progresses, so the balance sheet shows contract assets (work done but not yet billed) and contract liabilities (amounts billed or received ahead of the work). In smaller firms these appear as unbilled WIP and income in advance.

These balances rest on estimates. If the percentage complete on a fixed-price job is overstated, or the cost to complete is understated, profit is booked early and the loss arrives later, often after the business has changed hands. On the larger open contracts we ask for:

• the contract value, approved variations and claims still being negotiated
• costs to date and the current estimate of cost to complete
• the margin forecast at tender against the margin forecast now
• amounts invoiced, amounts received and amounts held as retention

Retentions deserve their own line. Many engineering contracts let the client hold back part of each payment until practical completion and the end of the defects liability period. Retentions receivable are a real asset when the work is sound and the client is solvent. Retentions tied to a job with an unresolved defects claim, or owed by a client in financial difficulty, may never be collected in full.

Claims and variations are the other judgement area. Revenue booked for variations the client has not yet approved is an estimate of a negotiation. We look at how the firm's past claims actually settled before deciding how much weight these carry.

Key engineers and who signs off the work

An engineering firm's reputation often rests on a few senior people: the principal who wins the work, the engineer clients ask for by name, the person whose sign-off the work depends on. Where the business depends on them, so does the value.

Registration adds a regulatory layer in some states. In Queensland, the Professional Engineers Act 2002 (Qld) requires professional engineering services in or for Queensland to be carried out by a registered professional engineer (RPEQ) or under the direct supervision of one. In Victoria, the Professional Engineers Registration Act 2019 (Vic) requires registration to provide professional engineering services in five prescribed areas: civil, structural, mechanical, electrical and fire safety engineering. A firm with one registered engineer covering all of its work in a state has a single point of failure.

We look at:

• how revenue and client relationships are spread across the senior team
• billable utilisation and charge-out rates by engineer, for consulting firms
• employment terms, restraints and any retention arrangements for key people
• how many staff hold the registrations the work requires, in each state the firm works in
• the depth of the next layer: project engineers and supervisors who could step up

When a shareholder engineer is leaving, the question becomes how much of the value walks out with them. Our shareholder valuation page covers how departing-shareholder valuations work, and our article on valuing a minority shareholding covers the minority question.

Do certifications and prequalification add value?

Large clients in energy, resources, water, defence and manufacturing rarely engage engineering firms they have not prequalified. Certified management systems, typically ISO 9001 for quality, ISO 45001 for occupational health and safety and ISO 14001 for environmental management, along with a clean safety record, are often minimum requirements to tender.

For value, certifications matter in three ways. They open doors that are closed to uncertified competitors, which supports margins. They cost money to keep, in audits, systems and staff time, and that cost belongs in the normalised overheads. And they may not move with the business: prequalification and approved-vendor status are usually granted to a particular company, so a sale of shares tends to keep them in place, while a sale of assets into a new company may mean requalifying with each client.

We ask which clients require which approvals, when each was last audited, and whether any client contract or approval needs consent on a change of ownership.

Margins, estimating and contract risk

Engineering margins depend heavily on the form of contract. Schedule of rates and cost-plus work earn lower margins but carry little estimating risk. Fixed lump-sum contracts can earn more, but one badly estimated job can wipe out a year's profit. We look at the mix, the record of actual against estimated margin on completed jobs, and the terms that shift risk onto the firm: liquidated damages, uncapped liability, long warranties, and payment terms that leave the firm funding its client.

A consistent pattern of jobs finishing below tender margin is a valuation issue even when each job has its own explanation. It tells a buyer that the estimating process, not bad luck, is the problem, and that the next lump-sum job may go the same way.

How the valuation comes together

For an established firm with a steady base of recurring work, capitalisation of maintainable earnings is usually the primary method, with earnings adjusted for owner salaries, related-party costs and one-off project gains or losses. For a firm whose next two years depend on a known backlog or a major contract change, a cash flow forecast often carries more weight. For a small consultancy whose value is largely its principal, we test whether any goodwill would survive that person leaving.

Net working capital, including WIP, retentions and contract liabilities, is assessed at a normal level and any excess or shortfall at the valuation date is adjusted. Engineering firms rarely carry heavy plant, so asset values seldom set a floor under the value. The people and the contracts do the work.

Most engineering valuations are completed from documents and conversations with the principals. Once engaged, you upload documents through the private link on your matter, never by email, and your information stays confidential. Fees are fixed and based on annual turnover; the bands are in the fee table below and on our pricing page.