Construction Accounting 101 for Contractors [2025]

The construction industry presents several unique accounting challenges. Construction companies must prepare industry-specific financial data and maintain precise project management. 

Construction accounting requires specialized knowledge of construction concepts and industry practices. Accurate accounting and bookkeeping support financial management and informed decision-making. Your accounting process is also critical to your construction firm’s financial health. 

This article will explain industry-specific challenges, construction accounting concepts, and financial reporting for construction businesses.

How Construction Accounting and Bookkeeping Differ from Traditional Industries

Construction firms must consider the following unique industry aspects for accurate accounting and bookkeeping. 

• Long-term contracts: Accounting for complex, long-term projects requires tracking each contract’s income and expenses over multiple months or years. 

• Varying locations: Every construction project takes place at a different job site.

• Unique inputs: Each job requires a different mix of materials, vendors, equipment, and subcontractors. Construction firms must manage and track varying costs and navigate varying availability.

• Project-based contracts: Construction businesses work on a project-by-project basis, which requires individual project tracking. 

• Slow cash collection: Since projects are long-term, customer billings and collections occur over several years. Construction companies recognize profits and cash flows over several accounting cycles.

• Retainage: Many construction contracts include stipulations allowing customers to retain part of the contract fees until project completion.

• Change orders: Project specifications could change multiple times during the contract's life.

Construction accounting presents unique challenges, but accurate bookkeeping doesn’t have to be challenging. 1-800Accountant offers dedicated bookkeeping services for construction companies.

Construction Accounting Terms and Concepts to Understand

The following terms represent standard components of construction accounting and bookkeeping.

Job Costing

Contractors must track each construction job separately. Job costing schedules reflect estimated and actual revenues and expenses for each contract. The company updates the job costing schedules with actual costs and updated profit margins throughout each project.

Accurate job costing helps the company understand each project’s financial health. 

Retainage

Construction projects often include contract retainage, a percentage of the contract fees the customer withholds until the construction firm completes the project. Retainage encourages construction firms to perform high-quality work.

Change Orders

Change orders modify the construction contract terms. These changes could increase or decrease the project length, modify the design, or require architectural alterations. Change orders require construction firms to recalculate project profitability and financial metrics for the revised contracts.

Accounting Methods

Your construction business must use an accounting method for its bookkeeping and financial reporting. Most companies use either cash or accrual-basis accounting. The main difference between the methods is the timing of recognizing revenues.

Cash Accounting

Many small businesses use the cash method due to its simplicity. Cash-basis accounting requires companies to recognize income and expenses when cash changes hands. For example, a cash-basis construction company recognizes revenue when the client pays the invoice. 

Accrual Accounting

Large or established businesses often use accrual-basis accounting, which complies with Generally Accepted Accounting Principles (GAAP). Publicly traded companies use accrual accounting for financial reporting.

The accrual method requires companies to recognize revenue when earned, even if the business hasn’t received cash. For example, an accrual-basis construction company recognizes revenue throughout the construction project. Performing the construction work generates earned revenue, regardless of the billing schedule.

Construction companies often use accrual accounting. The accrual method helps contract-based businesses comply with revenue recognition standards.

1-800Accountant can help your business maintain accurate bookkeeping, regardless of your accounting method. Consult industry professionals for help with your construction accounting.

Revenue Recognition Methods for Accrual Accounting

Accounting Standards Codification (ASC) 606 is a set of rules for recognizing contract revenue. Contract-based businesses using the accrual accounting method must follow ASC 606 to comply with GAAP.

Construction companies can use one of the following methods to recognize project revenues.

Percentage of Completion Method

Under the percentage of completion method (PCM), the construction company recognizes revenue over time. 

As each project progresses, the business must estimate the percentage of total work completed. The PCM determines how much revenue the company recognizes. Even if the client hasn’t paid a progress bill, the construction firm records revenue for accounting purposes.

For example, if a project with a total fee of $100,000 is 20% complete, the company recognizes revenue of $20,000. 

Completed Contract Method

Under the completed contract method, the construction company recognizes revenue after finishing the project. Your business can send progress bills and collect cash, but your bookkeeping does not record income until you’ve completed the project.

1-800Accountant’s industry specialists can help your business determine the best revenue recognition method and accurately account for construction revenue.

Understanding Construction Contracts and Billing

Construction firms use various types of contracts for project pricing and billing. Each contract type uses a different method to determine the project fees and timing of progress billings.

Your contract type determines the total revenues and project costs your company recognizes.

Cost-Plus Contracts

Cost-plus contracts establish a profit margin for the construction company. The client pays the contractor for materials, overhead expenses, and labor costs. Project fees include the added profit percentage.

Guaranteed Maximum Price Contracts

A guaranteed maximum price contract cannot exceed the agreed-upon fee cap. The construction company can charge up to the maximum price but cannot bill for unexpected extra costs.

Lump Sum Contracts

Lump sum or fixed price contracts establish a fee per phase or for the entire project. The contractor charges a fixed price regardless of overruns or unexpected costs.

Time and Materials Contracts

When using a time and materials contract, the construction company charges the client a set price for each input. The client pays for material costs and an hourly fee for labor.

Unit Price Contracts

A unit price contract includes a fee for each unit or phase. For example, a flooring contract could establish a price for each tile or square foot of carpet.

Financial Reporting for Construction Accounting

Construction firms use several types of reports for project management and financial decision-making. Many construction companies prepare the following: 

• Financial statements represent a summary of the company’s financial information for the reporting period.

• Job costing schedules detail the estimated costs and revenues to complete each contract. The reports include an estimate vs. actual comparison.

• Work in Progress (WIP) and/or Construction in Progress reports summarize billings and expenses for ongoing projects.

Professional CPAs can help you streamline your financial reporting. Consider 1-800Accountant for outsourced bookkeeping services to support your construction accounting. 

Books to Keep: General Ledger Elements and Income Statements

Construction accounting software helps your business generate financial statements and manage construction costs. However, contractors must understand the bookkeeping concepts. Consider the following components of your financial reporting.

Chart of Accounts

Your chart of accounts lists every account number and description. The listing helps your business organize transactions and balances for accurate accounting.

Balance Sheet

A balance sheet summarizes everything the company owns and owes at the report date. Every balance sheet includes assets, liabilities, and equity.

Assets

Assets help your business generate revenue. A contractor's assets could include the following: 

• Cash

• Accounts receivable and/or retention receivable

• Tools and supplies

• Equipment

• Buildings

Liabilities

Liabilities include amounts your company owes, such as credit card balances, business loans, mortgages, and accounts payable. Liabilities represent future expenses.

Equity

Equity includes owner or third-party investments in the business. For example, if a business owner contributes cash to the company, the owner establishes equity. Depending on your business structure, equity can include stock or other capital.

Income Statement

An income statement, or profit and loss statement, calculates the company’s net profit for the reporting period. Many businesses generate profit and loss statements every quarter and for the year. Income statements include revenue, expenses, and net income.

Revenues

Revenues represent income from construction projects. Contractors must follow ASC 606 revenue recognition principles for accrual method accounting.

Expenses

Expenses detail the company’s spending for the reporting period, including the following items:

• Direct costs of labor and materials

• Indirect costs, such as utilities, rent, and insurance

• Overhead costs of running the business, including back-office and administrative expenses

Statement of Cash Flows

A statement of cash flows summarizes the company’s cash transactions during a reporting period. The report includes categories for day-to-day operations, investments in the business, and obtaining financing.

Accounting Ratios

Many business owners and investors use the following accounting ratios to make financial decisions. Construction management companies can use accounting ratios to understand project profitability and the business’s financial health.

Current Ratio

The current ratio compares the company’s current assets to its current liabilities. The result highlights whether the business could cover short-term debts. 

Quick Ratio

Similarly, the quick ratio determines how quickly the company can pay off outstanding short-term debts. This ratio compares cash, accounts receivable, and securities to current liabilities.

Debt-to-Equity Ratio

The debt-to-equity ratio compares the company’s outstanding liabilities to total equity. The result helps the business understand whether its operations are primarily funded by debt or equity.

Accounting for Construction Payroll

The construction industry presents unique payroll challenges. For example, construction firms follow varying wage requirements for employees and subcontractors. 

Additionally, contractors must comply with IRS payroll tax reporting requirements. 

Accounting for construction wages and payroll taxes can be time-consuming and confusing. We recommend outsourcing your payroll services to industry experts. 1-800Accountant can help your business comply with accounting and tax rules for your payroll.

Talk to Construction Accounting Experts at 1-800Accountant

Construction accounting may feel daunting, but you can rely on industry professionals to support your financial reporting. 1-800Accountant offers outsourced bookkeeping and accounting services for construction companies.

Partner with a dedicated team for hands-on support. Your secure, cloud-based portal offers real-time financial data so you can understand project profitability and proactively manage costs. 

Schedule a call with 1-800Accountant for help with your construction accounting and bookkeeping.