📚 Construction Accounting 101
Construction accounting is different from other industries. Understanding the basics helps you run a profitable company.
Why Construction Accounting is Different
Key Differences
- Project-based - Track costs by project, not just by period
- Long-term projects - Revenue recognized over time
- Work in progress - Costs incurred before billing
- Retainage - Money held until completion
- Change orders - Scope changes affect revenue/costs
- Equipment - Major capital investment
Basic Accounting Concepts
The Accounting Equation
Assets = Liabilities + Equity
Assets: What you own (cash, equipment, receivables) Liabilities: What you owe (payables, loans) Equity: Owner's stake (capital, retained earnings)
Accrual vs. Cash Basis
Cash basis:
- Record revenue when received
- Record expenses when paid
- Simple but inaccurate for construction
- Not allowed for larger contractors
Accrual basis:
- Record revenue when earned
- Record expenses when incurred
- Required for most contractors
- More accurate picture
Construction-Specific Accounting
Job Costing
Track costs by project:
- Labor costs
- Material costs
- Subcontractor costs
- Equipment costs
- Overhead allocation
Why it matters:
- Know if projects are profitable
- Price future work accurately
- Identify problem projects early
Work in Progress (WIP)
WIP represents:
- Costs incurred but not yet billed
- Billings made but work not complete
- Net WIP affects your balance sheet
Underbillings (asset):
- Costs exceed billings
- You've spent more than billed
- Need cash to fund
Overbillings (liability):
- Billings exceed costs
- You've billed more than spent
- Improves cash flow
Revenue Recognition
Percentage of completion:
- Recognize revenue as work progresses
- Based on costs incurred vs. total costs
- Most common method
Completed contract:
- Recognize revenue when project complete
- Only for short-term projects
- Less common
Key Financial Statements
Income Statement (P&L)
Shows:
- Revenue
- Cost of goods sold (direct costs)
- Gross profit
- Overhead expenses
- Net profit
Key metrics:
- Gross margin % = Gross profit ÷ Revenue
- Net margin % = Net profit ÷ Revenue
Balance Sheet
Shows:
- Assets (what you own)
- Liabilities (what you owe)
- Equity (owner's stake)
Key metrics:
- Working capital = Current assets - Current liabilities
- Current ratio = Current assets ÷ Current liabilities
Cash Flow Statement
Shows:
- Operating activities (from running business)
- Investing activities (buying/selling assets)
- Financing activities (loans, owner draws)
Why it matters:
- Profit ≠ Cash
- Can be profitable but cash-poor
- Shows where cash comes from/goes
Common Accounts
Assets
Current assets:
- Cash
- Accounts receivable
- Work in progress (underbillings)
- Retainage receivable
- Inventory
Fixed assets:
- Equipment
- Vehicles
- Buildings
- Less: Accumulated depreciation
Liabilities
Current liabilities:
- Accounts payable
- Accrued expenses
- Current portion of debt
- Work in progress (overbillings)
- Retainage payable
Long-term liabilities:
- Long-term debt
- Equipment loans
Equity
- Owner's capital
- Retained earnings
- Current year profit/loss
Cost Types
Direct Costs
Project-specific costs:
- Labor (field labor)
- Materials
- Subcontractors
- Equipment (project-specific)
- Other direct costs
Tracked by project - Know cost per project
Indirect Costs (Overhead)
Company-wide costs:
- Office salaries
- Office rent
- Insurance
- Utilities
- Office supplies
- Marketing
Allocated to projects - Spread across all projects
Accounting Methods
Percentage of Completion
How it works:
- Estimate total project cost
- Track costs incurred
- Calculate % complete = Costs incurred ÷ Total estimated cost
- Recognize revenue = % complete × Total contract value
Example:
- Contract: $1,000,000
- Estimated cost: $800,000
- Costs incurred: $200,000
- % complete: $200,000 ÷ $800,000 = 25%
- Revenue recognized: 25% × $1,000,000 = $250,000
Completed Contract
How it works:
- Recognize revenue when project complete
- Recognize costs when project complete
- Only for short-term projects (< 1 year typically)
Common Accounting Tasks
Daily/Weekly
- Enter transactions - Bills, invoices, payroll
- Code costs - Assign to projects/cost codes
- Reconcile accounts - Bank, credit cards
- Review reports - Job cost, cash flow
Monthly
- Close month - Finalize month-end
- Financial statements - P&L, balance sheet
- WIP schedule - Update work in progress
- Job cost reports - Review project profitability
- Aging reports - AR and AP aging
Quarterly/Annually
- Tax preparation - Quarterly estimates
- Annual statements - Year-end close
- Audit preparation - If required
- Budget review - Compare to budget
Software Options
QuickBooks
Best for:
- Small contractors ($0-5M)
- Simple job costing
- Basic reporting
Limitations:
- Limited job costing
- WIP in Excel
- Limited users
Construction-Specific Software
Examples:
- Sage 100 Contractor
- Foundation Software
- Viewpoint Vista
- CMiC
Benefits:
- Better job costing
- Integrated WIP
- More users
- Better reporting
Common Mistakes
| Mistake | Problem | Solution |
|---|---|---|
| Not tracking by project | Don't know profitability | Set up job costing |
| Mixing personal/business | Messy books | Separate accounts |
| Not reconciling | Errors accumulate | Reconcile monthly |
| Ignoring WIP | Cash flow problems | Track WIP monthly |
| Poor cost coding | Can't analyze | Consistent coding |
Getting Help
When to Hire
- Outgrowing QuickBooks - Need more features
- Don't have time - Focus on operations
- Making mistakes - Need expertise
- Growing - Need better systems
Options
- Bookkeeper - Day-to-day transactions
- Accountant - Monthly/quarterly work
- CPA - Tax, financial planning, audits
- CFO/Controller - Financial management
Related Resources
- Job Costing Basics - Detailed job costing guide
- Financial Statements - Understanding statements
- Chart of Accounts - Setting up accounts
- Cash Flow Management - Managing cash
Start Simple
You don't need complex systems to start. Get the basics right—track costs by project, reconcile monthly, understand your financial statements. Build from there.