EPC and contracting: order book, unbilled revenue, and percentage-of-completion as a lever

An engineering-and-construction contractor reports steady, healthy revenue growth and improving profit. Its receivables sit at 140 days — a number that, in almost any other business, would scream that customers are not paying. And its unbilled revenue is growing three times faster than its billed revenue, quietly, in a line most readers never open. One of these facts is completely normal and the other is a warning, and telling them apart is the whole skill of reading a contractor. illustrative

An EPC company — engineering, procurement, construction: a contractor paid to build an asset for its owner — builds large, long projects — a power plant, a metro line, a highway — over several years, and its accounts are shaped by two facts. First, the customer withholds a slice of every bill as retention money until the project is finished and proven defect-free, so a contractor is always owed a large amount that is not overdue but simply held back by contract. That makes 140 receivable days structural, not a collection problem. Second, because a project spans years, the contractor cannot wait until completion to book revenue — it recognises revenue over time, in proportion to how complete each project is judged to be. And "judged to be" is the crack in the floor: the percentage of completion is an estimate, and an estimate is a lever.

So this module reads a contractor through three numbers the ordinary reader skips. The order book, which is the visible future work and the true leading indicator. The retention money buried in receivables, which explains why the days are high without alarm. And unbilled revenue, which is where the percentage-of-completion lever shows up — revenue claimed but not yet billed, and the first place a contractor inflating its earnings will leave a trace.

The previous module read a developer, whose revenue is recognised in one lump at completion. A contractor is the smoother twin: it recognises revenue over time, as the project progresses, which avoids the developer's lumps but introduces an estimate the developer does not have. This module exists because that estimate — the percentage of completion — is both the thing that makes a contractor's accounts readable and the lever by which they can be gamed, and because the sector's receivables and order book behave in ways that mislead a reader applying ordinary instincts.

Four ideas carry it. The order book is the value of contracted work not yet executed — the leading indicator of future revenue, read against annual revenue as book-to-bill (orders in hand divided by one year's revenue — the years of work already booked). Retention money is the portion of each bill the customer withholds until completion, which sits in receivables and makes a contractor's receivable days structurally high without signalling a collection problem. Unbilled revenue is revenue the contractor has recognised on its completion estimate but not yet billed to the customer. And the percentage-of-completion lever is the judgement behind it all: by estimating a project as more complete than it is, a contractor can recognise revenue and profit ahead of the actual work, flattering the current year at the expense of a later reckoning.

Without this module, a reader makes three errors. They read a contractor's 140 receivable days as a red flag when it is just retention. They admire revenue growth without reading the order book, missing that a contractor can grow revenue while its pipeline empties. And they never open the unbilled-revenue line, missing the single clearest trace of an aggressive completion estimate. The point is to read the order book for the future, understand retention so the receivables do not frighten you, and watch unbilled revenue against billed to catch the lever being pulled.

Two pictures: the order book that leads revenue, and the unbilled line that reveals the lever.

The order book leads revenue. A contractor's revenue this year comes from executing work it won in prior years, so the order book — contracted work not yet done — is the leading indicator. Read against annual revenue, it gives book-to-bill: an order book 2.9 times revenue means nearly three years of visible work. The order book's trend matters more than its level: order inflow exceeding revenue (book-to-bill rising) means the pipeline is filling faster than it empties, so future revenue is secured; inflow below revenue means the contractor is living off its backlog, and today's revenue growth will reverse as the book runs down.

Retention money makes receivables look worse than they are. On a construction contract, the customer typically withholds 5-10% of each bill as retention, releasing it only when the project completes and the defect-liability period (the warranty window after handover during which the builder must fix any faults) passes — often a year or more later. That retention sits in the contractor's receivables the whole time, so receivable days of 130-150 are structural, not a sign customers are not paying. The check is to strip the retention out: the receivables net of retention should collect on ordinary terms, and it is a rise in the non-retention receivables, or in retention that never gets released, that signals a real collection problem.

Unbilled revenue is where the lever shows. Because revenue is recognised on the percentage of completion, a contractor books revenue as work progresses and bills the customer separately as contractual milestones are certified. The two rarely match exactly, and the gap is unbilled revenue — work recognised as revenue but not yet billed. A modest, stable unbilled balance is normal. But unbilled revenue growing much faster than billed revenue is the tell that the contractor may be recognising revenue on an aggressive completion estimate the customer has not certified, or booking disputed claims still under arbitration as if they were certain. That is the percentage-of-completion lever, and unbilled revenue against billed is where it leaves its fingerprint.

The lever itself. Estimating a project as 70% complete rather than 60% recognises another slice of revenue and profit now, with no change in the actual work done — the same estimate lever seen in depreciation and provisioning, applied to the top line. It reverses eventually, because a project can only be 100% complete once, so revenue pulled forward is revenue borrowed from a later year. A contractor whose margins look strong while unbilled revenue balloons is a contractor to distrust: the profit may be an estimate, and the cash — held back further by retention — is the slow truth that catches up.

Revenue recognition and receivables both mean something particular for a contractor, and reading them with another sector's rulebook produces confident errors.

The inversion worth holding is that a contractor's 140 receivable days are the design of the business, while the same 140 days in FMCG are a warning — the retention that is contractual in construction has no equivalent in fast-moving consumer goods, so the identical figure reads opposite ways. A reader who imports the FMCG rulebook rejects a healthy contractor for high receivables; a reader who imports the contractor's rulebook excuses genuine channel stuffing (loading distributors with more stock than they can sell, to inflate reported sales) in FMCG. The number is the same; the meaning is set entirely by whether retention explains it. This is the sharpest example in the sector of why a ratio must be read against the norms of its industry, and it is why the receivable-days line, so revealing in most businesses, has to be decomposed into retention and ordinary trade credit before it means anything for a contractor.

Read the composite EPC contractor. Its order book grew from ₹14,000 crore to ₹26,000 crore over five years, against revenue of ₹8,900 crore in the final year — a book-to-bill of about 2.9 times, so nearly three years of work is visible. And order inflow in the final year was ₹13,400 crore, comfortably above revenue, so the pipeline is filling faster than it empties. On the leading indicator, this is a healthy, growing contractor with secured future revenue — a far more useful read than the revenue line alone. illustrative

Now the receivables. They sit around 140 days throughout, which an FMCG reader would find alarming. But retention money — ₹1,360 crore in the final year, out of ₹3,420 crore of receivables — explains much of it: nearly 40% of the receivables is cash the customers are contractually holding back until projects complete, not money they are refusing to pay. Strip the retention out and the ordinary trade receivables collect on normal terms. The 140 days is structural, and reading it as a collection problem would be a category error.

Then the line that matters most: unbilled revenue. It grew steadily for three years in line with billing, then in the fourth year jumped 35% while billed revenue grew only 11%. That gap is the flag. In that year, the contractor recognised revenue well ahead of what it billed, which means either a genuine timing effect — work done late in the year, billable next year — or the percentage-of-completion lever being pulled, revenue booked on an optimistic completion estimate. It is not proof of manipulation, but it is exactly where you would look, and you would want the next year's billing to catch up and the cash to follow. A contractor whose unbilled revenue keeps outrunning its billing, year after year, is recognising profit its cash never confirms.

The habit to build: read a contractor from the order book inward. Start with the order book and book-to-bill for the secured future and whether the pipeline is filling or emptying. Decompose receivables into retention and ordinary trade credit so the high days do not mislead you. And watch unbilled revenue against billed — a stable ratio is healthy, a widening gap is the percentage-of-completion lever, and the cash, slowed further by retention, is the truth that eventually catches the estimate. The revenue and profit are real only to the extent the billing and the cash confirm them.

The order book tells you the volume of future work, but not its profitability. A contractor can win a large order book by bidding aggressively — taking projects at thin or even loss-making margins to keep its people and equipment busy — so a growing order book can be a warning as much as a comfort if it was bought with price. The book-to-bill measures how much work is secured; it says nothing about whether that work will be executed at a decent margin, which depends on the bidding discipline, the input-cost assumptions, and the risk of cost overruns on fixed-price contracts. A fat order book at bad prices is future revenue that destroys value.

Nor does unbilled revenue, on its own, prove the completion estimate is honest or dishonest. A widening unbilled-to-billed gap is a flag, but it can be genuine timing — a burst of work near year-end that bills next quarter — or aggressive recognition, and the line alone cannot distinguish them. Only the following periods resolve it: if the billing catches up and the cash arrives, it was timing; if the unbilled balance keeps growing and never converts, it was the lever. The number points you to the question; it takes several periods of watching the conversion to answer it.

And the accounts cannot fully reveal the execution and counterparty risks that decide a contractor's fate. A long project can run into land-acquisition delays, a customer who stops paying, a design change that triggers a dispute, or a cost overrun that turns a profitable contract into a loss — and much of this surfaces as claims under arbitration, contingent liabilities, and vague "expected to be resolved" notes rather than as clean numbers. A contractor booking disputed claims as receivable is recognising cash it may never see, and whether those claims are real is a legal judgement the statements cannot make for you. The order book, receivables and unbilled revenue read the shape of the business; the quality of the contracts and the reliability of the customers sit in the notes and the fine print.

How it comes up. When unbilled revenue grows fast, a sharp analyst asks whether it is timing or the lever. The question sounds like this: "Unbilled revenue grew 35% against 11% billed. How much is genuine year-end timing that bills next quarter, how much is claims under arbitration, and what's your expected conversion to billing and cash over the next two quarters?" The analyst is testing whether the recognised revenue is real.

A good answer, verbatim-style.

"Fair to probe. Of the increase, about two-thirds is timing — three large projects hit milestones in March that we billed in April, so it's already converting this quarter. The remaining third is a claim on a delayed government project, which we've recognised conservatively at 60% of the claimed value based on counsel's advice, and it's in arbitration with a hearing scheduled. We'd expect unbilled to normalise back toward one-times-billed growth by year-end. Retention is steady at about 40% of receivables and releasing on schedule."

It splits the unbilled growth into timing and claims, states how conservatively the claim is booked, gives a conversion expectation, and confirms retention is releasing. It lets you judge whether the revenue is real.

An evasive answer, verbatim-style.

"Unbilled revenue reflects the normal course of our project execution and our revenue recognition is fully compliant with accounting standards and reviewed by our auditors. We're confident in our order book and our execution capabilities, and we see strong growth momentum across our verticals. There's nothing unusual in our working capital."

Fluent and empty. It never splits timing from claims, never mentions the arbitration exposure, and gives no conversion timeline. "Compliant with accounting standards" confirms the recognition is permitted, not that it is conservative, and "nothing unusual" is the exact reassurance a contractor pulling the completion lever would also offer.

The follow-up nobody asks. "How much of unbilled revenue is claims under arbitration, and what has your unbilled-to-billing conversion actually been over the last four quarters?" That forces the disputed portion and the conversion track record into the open. Watch what happens when it is not asked. If "normal course of execution, fully compliant" is allowed to stand, an investor credits revenue recognised on an aggressive estimate and disputed claims as if it were cash. The silence is the tell — either the claims are a large, uncertain chunk of the recognised revenue, or the conversion history would show unbilled that never turns into cash.

The first trap is reading a contractor's receivable days with an ordinary rulebook. At 140 days, a contractor looks as if its customers are not paying, and a screener flags it exactly as it would an FMCG company with the same figure. But the retention money withheld until completion makes long receivables structural in construction, and rejecting a contractor for high days without stripping out retention is discarding a healthy business for a feature of its sector. The number has to be decomposed into retention and ordinary trade credit before it means anything.

The second trap is admiring revenue growth without reading the order book. A contractor can grow revenue for a year or two by executing its backlog faster while winning no new work, so the revenue rises even as the pipeline empties — and when the backlog runs out, the revenue falls with it. The order book and book-to-bill are the leading indicators, and a contractor whose revenue is growing while its order inflow lags is living off its past, not building its future. Reading the revenue line and skipping the order book gets the durability exactly wrong.

The third trap is never opening the unbilled-revenue line. It is the single clearest trace of the percentage-of-completion lever, and it is a line most readers skip entirely. A contractor recognising revenue on an aggressive completion estimate, or booking disputed claims as receivable, leaves the evidence in unbilled revenue growing faster than billed — profit recognised now that the cash, slowed further by retention, may never confirm. A reader who admires the margin and never checks whether the billing and cash are keeping pace with the recognised revenue is trusting an estimate dressed as a result, and the reckoning comes when the unbilled balance has to convert and does not.