Accounting for contractors - 7 common mistakes to avoid

60%of construction businesses face cash flow problems at some point each year. For contractors, this risk is high because projects take months, involve multiple labor and subcontractors, and payments are often delayed or partially held as retainage.

Even small accounting mistakes such as not tracking costs properly or ignoring retainage, can turn a profitable project into a loss. Keeping accurate books helps contractors see exactly how much each project earns, manage cash flow, and make decisions with confidence.

This article highlights seven common accounting mistakes contractors make and show show to fix them. Applying these practices helps protect profits, avoid financial stress, and run the business smoothly.

^{Why Accounting Errors Cost Contractors?}

Construction contractors face financial pressures as compared to other businesses.  The projects last for months, that involve multiple subcontractors, and require tracking labor, materials, and equipment for each job.

Payments often take weeks or even months to arrive. On top of that, retainage locks up a big part of the cash, making it harder to manage day-to-day expenses.

These conditions create several common problems when accounting is not handled correctly:

• Cashflow shortages: When invoices or retainage are mismanaged, contractors don’t have enough money to pay suppliers, subcontractors, or workers on time. This can delay projects, damage relationships, or even incur late fees.
• Inaccurate job profitability: Without tracking costs properly, contractors can’t tell which projects are truly making money. Labor overruns, material waste, or unrecorded expenses can silently erode profits. This means that the estimated amount exceeds and there is no profit.
• Bidding errors: Contractors often rely on past project data to bid new jobs. Incomplete or incorrect accounting leads to underbidding, losing money, or overbidding and losing contracts to competitors.
• Tax risks and compliance issues: Misclassified expenses, overlooked deductions, and poor recordkeeping leads to costly audits, penalties, and missed tax savings.
• Difficulty in securing financing and bonding: Lenders and insurance companies require clear, organized financial records. Inaccurate books reduce credibility and make it harder to get loans or bonds for larger projects.

Because margins are already thin in construction, these are big mistakes that can turn profitable work into loss. It is important to have correct bookkeeping because it is important for understanding real project performance and planning future.

^{The 7 Critical Accounting Mistakes (and How to Fix Them)}

Even a single mistake in accounting can completely ruin your full project costing. Spotting common mistakes early and fixing them, helps contractors keep their finances organized, protect their profits, and plan better for future jobs.

Here are seven accounting mistakes and their quick fix that every contractor should follow.

Mistake 1: Ignoring True Job Cost

Job costing is knowing the exact value of project, that includes expenses like materials, labor, equipment rentals, or overhead aren’t tracked by job. It is difficult to guess which projects are profitable and which are draining cash. Without tracking costs properly, contractors can lose money on a project without knowing it.

Mistake 1: Ignoring True Job Cost

Job costing is knowing the exact value of project, that includes expenses like materials, labor, equipment rentals, or overhead aren’t tracked by job. It is difficult to guess which projects are profitable and which are draining cash. Without tracking costs properly, contractors can lose money on a project without knowing it.

Let’s take an example of a small job

• Contract price 12,000
• Materials 3,250
• Labor 130 hours at 28per hour equals 3,640
• Subcontractor 1,150
• Equipment rental 650
• Consumables 300
• Allocated overhead 820

Total costs recorded correctly = 9,810. Profit =12,000 minus 9,810 = 2,190.

Now imagine a few items were not recorded: a pending purchase order for a specialty part of 900, a change order that was not billed, and 10 hours of overtime billed at 42 per hour equals 420. Those missed items add 1,820. New total costs = 11,630. Profit falls to 370.

Such things can lead to a major profit loss.

Why this happens

• Field crews report hours late or on paper that never gets entered.
• Purchase orders and subcontractor commitments sit outside the accounting system.
• Overhead and equipment costs do not get allocated to jobs.
• Change orders are not captured or billed immediately.

The Fix: True Job Costing, step by step

•  Create the job in the system before work starts: Enter the contract value, the budget items, and an initial cost plan. That gives a baseline to measure against.
• ‍Record commitments right away: Enter purchase orders and subcontractor agreements as soon as they are issued. Treat committed costs as real obligations even if not yet invoiced.
• ‍Capture field time daily: Use mobile time entry or a simple app so crew hours reach accounting the same day. Do not wait for weekly paper timesheets.
• ‍Enter materials and receipts at point of purchase: Snap photos of receipts on the phone and attach them to the job. Link material purchases to the job code.
• ‍Track change orders with approvals and pricing: Create a clear change order workflow and enter approved changes immediately. Bill the change order as soon as possible.

Mistake 2: Mismanaging Retainage

Retainage is the portion of a payment that a client holds back until the project or a phase of it is complete. As it’s common in construction sector, many contractors treat retainage like regular income or fail to track it separately. This can create a false sense of available cash and distort profits, which leads to cash flow shortages or delayed payments to subcontractors.

Example - a mid-size renovation job:

• Contract total: $50,000
• Retainage: 10% = $5,000
• Progress payments received: $40,000

If the contractor records the full $45,000 as income without separating retainage, reports will show higher available cash than exists. Subcontractors and suppliers paid expecting funds that are still held by the client, causing financial stress.

The Fix: Track Retainage Separately

1. ‍Set up retainage receivable and payable accounts in the accounting system.
2. ‍Record retainage immediately when invoices are issued, not when payment is received.
3. ‍Monitor retainage balances regularly to know exactly how much is owed by clients and owed to subcontractors.
4. ‍Include retainage in cash flow projections to avoid overcommitting funds.

Mistake 3: Relying on Cash Basis Accounting

Many small contractors use cash basis accounting because it’s easy. They only record when there is any expense paid or when they have received cash. This method do not show the actual financial picture of long-term projects.

Construction projects last for months and have very slow payment process.

Example - a commercial fit-out project:

• Project cost: $80,000
• Materials purchased upfront: $30,000
• Labor paid: $25,000
• Payment received from client so far: $40,000

A cash basis report would show $40,000 income against $55,000 expenses, indicating a $15,000 loss. But if retainage or future billings aren’t accounted for, the actual profit picture is distorted, and tax obligations may be miscalculated.

The Fix: Use Accrual or Percentage of Completion Accounting

• ‍Record revenue and expenses when earned or incurred, not when cash changes hands.
• ‍Track progress billing and retainage to reflect project performance accurately.
• ‍Monitor accounts receivable and payable regularly to forecast cash flow and plan payments

Mistake 4: Poor Labor and Equipment Allocation

Tracking labor and machinery cost is important for construction contractors. Many businesses make the mistake of allocating supervisor time, employee hours, or equipment usage broadly across multiple projects instead of recording them per job. This affects job costs and hide areas where money is being wasted.

Example- residential renovation project:

• Electrician hours recorded generally for the week: 120 hours
• Equipment used: 2 generators, 1 crane, 1 cement mixer
• Without proper allocation, it’s unclear how much labor or equipment was used for this specific project.

Asa result, the contractor undercharges clients or fail to see which projects are consuming more resources than planned, reducing overall profitability.

The Fix: Use Digital Time Tracking and Equipment Rate Schedules

• Record employee hours on a per-job basis using digital time sheets.
• Track equipment usage and apply standard rates to each project.
• Include labor burden costs, benefits, taxes, and insurance to get the exact cost of work.

Mistake 5: Failing to Track Committed Costs

Contractors has agreed to pay the committed costs, even if the actual payment does not occur. These include purchase orders (POs) for materials, subcontractor agreements, or signed service contracts. Many contractors overlook these, leading to underestimating expenses and overestimating available cash.

Example - commercial build:

• Contractor issues a PO for $20,000 of steel.
• Subcontractor agreement for plumbing is $15,000.
• Payment isn’t due yet, so the expense isn’t recorded.

Without tracking these committed costs, the contractor assumes they have $50,000 in free cash, when $35,000 is already obligated. This can cause cash shortages, delayed payments, or even project halts.

The Fix: Integrate POs and Agreements into Accounting

1. Record all committed costs immediately when agreements or POs are signed.
2. Track them separately from paid expenses to see true financial obligations.
3. Review committed costs regularly to adjust cashflow and project budgets.

Mistake 6: Lack of Regular WIP (Work-in-Progress) Reporting

Work-in-Progress(WIP) reports show the financial status of ongoing projects. They reveal whether a job is overbilled (you’ve billed more than the work completed) or underbilled (you haven’t billed enough for the work done). Many contractors skip regular WIP reporting, leaving them blind to project profitability and cash flow risks.

Example - residential renovation:

• Contractor has completed 60% of a project costing $50,000.
• They’ve billed the client only $20,000.
• Without WIP reporting, the contractor thinks the project is on track, but $10,000 of work remains unpaid, putting pressure oncash flow.

The Fix: Create Monthly WIP Reports

• Record all project costs, including labor, materials, and subcontractor payments.
• Compare costs to the percentage of work completed and invoices sent.
• Use WIP reports to adjust billing, forecast cashflow, and prevent project losses.

^{Mistake 7: Choosing Generic Accounting Software}

Many contractors try to manage their finances using standard accounting tools designed for retail or service businesses. These tools cannot handle construction specific needs like job costing, retainage tracking, or AIA billing. Using generic software can lead to errors in project costing, misreported profits, and cash flow problems.

Example - small commercial project:

A contractor uses basic accounting software to track expenses for three simultaneous projects.

The software groups all cost together instead of allocating them to each job.

At the end of the month, the contractor cannot tell which project is profitable or which one is running over budget.

The Fix: Invest in Specialized Accounting Software for Contractors

• Choose software or look for CFO services that will help you out in managing all your finances like Atheneum
• Ensure it tracks retainage receivable and payable accurately.
• Look for features like integration with project management tools and customized reporting.

^{Conclusion: Take Control of Your Construction Finances}

Accounting mistakes in construction creates huge losses, delay projects, and cash flow headaches.  Contractors who implement accurate job costing, track retainage carefully, maintain WIP reports, and use specialized accounting tools/services gain a clear view of project performance, cash flow, and overall business health.

Book a consultation with Atheneum today and take the first step toward better financial management for your construction business.