Why construction accounting is its own animal!
Projects stretch over weeks or months. You bill in chunks, hold retainage, juggle change orders, and front materials. That gap between work done, invoices sent, and cash received creates unique bookkeeping headaches. The right construction accounting method lines up revenue with costs, so pricing, cash, and taxes make sense.
What you’ll get here: plain‑English explanations of cash, accrual, completed‑contract (CCM), and percentage‑of‑completion (POC), plus job‑costing, WIP, and a simple path to pick your method.
Construction Accounting Methods – Side-by-Side View
Many firms manage on accrual and choose CCM or POC for tax. Books and taxes can differ—coordinate with your CPA.
Job costing: the non‑negotiable foundation
Regardless of method, job‑level visibility is non‑negotiable. Every project should capture direct costs, such as labor, materials, subcontractors, equipment, and permits, along with the indirect burden borne by labor, such as payroll taxes, benefits, and general liability. Your items and cost codes should mirror how you estimate, purchase, and bill so that actuals can be compared to estimates without translation. Change orders and retainage belong on the job record from the moment they appear; paperwork should never trail the work. If you operate in multiple regions or divisions, classes or locations can add helpful slices without complicating the general ledger.
How POC actually works
POC is simpler than it sounds. First, estimate your total job cost. Each month, divide costs to date by that estimate to find the percent complete. Multiply that percentage by the contract price to calculate revenue earned to date, then compare earned revenue to billings to date. The difference reveals whether you are over‑ or under‑billed. For example, on a $200,000 contract with a $160,000 cost estimate, spending $80,000 means you’re 50% complete and have earned $100,000 of revenue. If you’ve billed $120,000, you are $20,000 over‑billed—great for cash now, but keep an eye on the remaining margin.
WIP as your job health dashboard
A Work‑In‑Progress schedule pulls each job into one view: contract value, costs to date, percent complete, revenue earned, billings to date, and the over‑/under‑billing position. Updating WIP monthly (or bi‑weekly on fast‑moving work) turns it into a cash forecast, an early‑warning system for problem jobs, and a lender‑ready packet. Over‑billing signals that cash has arrived ahead of costs, and you must protect the remaining margin; under‑billing tells you to prioritize progress invoices to prevent a cash squeeze.
Construction quirks to get right
A few areas deserve special attention. Retainage should be recorded as a separate receivable so you don’t treat it as current cash. Mobilization and deposits require clear contract language and dedicated items to ensure they’re tracked and recognized correctly. Change orders are best captured in the field with photos and notes, routed for same‑day approval, and invoiced on a predictable cadence—many firms like a simple “Friday CO invoice” habit.
Materials on hand can skew the percent complete if they’re not tracked carefully. And to see real margins, make sure labor burden and other indirects are attached to jobs rather than stranded in a single overhead bucket. State sales and use tax rules vary, so keep exemption documentation tidy. If you work under certified payroll, build that requirement into your labor capture process.
Choosing your method
Match method to project reality. If your jobs are short—often under three months—and billing is straightforward, accrual books with a CCM tax election can work well. If projects run for many months or your bank and bonding partners want GAAP‑style visibility, accrual paired with POC and a monthly WIP is the safer path. As revenue scales past roughly $1 million or you begin bidding competitively, the combination of accrual accounting, disciplined job‑costing, and consistent WIP becomes essential regardless of your tax choice. Your CPA should advise on elections and state nuances, while your bookkeeper and CFO keep the daily engine clean and the reports decision‑ready.
**Mostly short jobs, <3 months, simple billing? Cash or accrual + CCM for tax may be fine.
**Multi-month projects, lender/bonding requirements? Accrual + POC with WIP.
**Growing >$1M and bidding competitively? Accrual + job costing + WIP regardless of tax choice.
**Talk to your CPA about tax method elections and state rules; your bookkeeper/CFO ensures daily accuracy and WIP integrity.
QuickBooks Online in practice
QuickBooks Online can support this workflow if you turn on Projects and build an items list that mirrors your cost codes. Create estimates and convert them into progress invoices, including a dedicated retainage item to separate that balance from normal receivables. Custom fields help track change‑order numbers and approvals.
Use Project Profitability and Unbilled Estimates to monitor performance, add an AR Aging that isolates retainage, and export a WIP view to Sheets or Excel for percent‑complete calculations. Automated reminders at 7, 14, and 21 days, along with ACH or card options, will shorten the cash cycle without adding staff time.
Common pitfalls—and better habits
Most pain points trace back to a few avoidable habits: treating retainage as normal AR, skipping a defined change‑order path, stuffing all job costs into a single GL bucket, billing by calendar rather than progress, or ignoring equipment cost recovery. The cures are straightforward: track retainage separately, capture and approve change orders before crews move on, code costs through items so slippage is visible, tie invoices to milestones, and allocate equipment using a simple internal rate sheet.
FAQs
Can I manage on accrual but file taxes using CCM? Yes. It’s common to keep accrual books for visibility and elect CCM for tax; work with your CPA on elections and maintenance.
Do quick, two‑to‑four‑week jobs need POC? Usually no. Accrual with strong job costing is plenty; a light WIP still helps spot issues early.
How often should I update WIP? Monthly is the minimum; faster updates help when jobs move quickly, or cash is tight.
What if my estimate changes mid‑job? Update your estimate at completion (EAC), then recalculate percent complete and earned revenue so your WIP reflects reality.
What to do next
If this raised as many questions as it answered, you’re ready for a short working session. Book a Job‑Costing & WIP Review, and you’ll leave with a method choice, a clean items list, and a simple WIP template you can maintain.
