The Ultimate Guide for Accounting for Construction Companies

Managing finances in the construction industry is more complex than any other traditional business. Construction sector is project-based, involve multiple stakeholders, and lasts for months or even years. Contractors, owners, and project managers should understand accounts and finance to maintain compliance and achieve long-term success.

Construction accounting includes advance bookkeeping. It tracks every single cent spent on labor, materials, and subcontractors at the project level, monitors cash flow, and provides critical insights into each project’s profitability. In construction, margins are small and payments are late, so accurate financial management helps your business grow faster.

This article will explain the core pillars of construction accounting, the financial processes, and the best practices for managing the finances of your construction business.

^{Construction Accounting Demands a Specialist Guide}

Construction accounting is different from regular business accounting because each project has its own costs, labor, and materials. Contractors track every job separately to understand the profit and loss of every project. Correct financial records help manage cash flow, plan for slow payments, and be prepared for loans, bonds and taxes.

^{Defining Construction Accounting vs. Standard Business Accounting}

In regular business accounting, you track overall sales and expenses for the company whereas in construction, each project has its own costs for labor, materials, and subcontractors. This approach helps contractors see which jobs are profitable and which are not, that makes it easier to plan, budget, and make reasonable decisions.  

So, the main difference between construction accounting and standard business accounting is that construction accounting is project-focused, not product-focused.

^{The High Stakes of Construction Financial Health}

Many construction projects run on thin margins, with delayed payments which makes managing cash flow a big task. Updated financial records makes it easy to manage the accounts as this saves them from running out of money, overspending, or misjudging project performance.

Good construction accounting also provides trustworthy reports that are required for bonding, loans, and tax compliance. This section forms the foundation of construction financial management, helping contractors protect their business.

^{The Pillars of Construction Accounting}

Every construction company needs a key system to keep its finances on track. The main areas to focus on are job costing, retainage, and work-in-progress (WIP) reports. Let’s understand each one in detail.

Pillar 1: Job Costing

Job costing is the process of tracking all costs for a project, including materials, labor, and subcontractor expenses. Every project is treated individually, so you can see exactly how much each job costs and how much profit is generated.

This helps contractors compare estimated costs with actual expenses, that identifies areas where the project went over budget and where savings were possible. This approach clearly differentiates between the profit and loss of the business.

The Importance of Labor Burden

Labor is more than just the hourly wage paid to employees. Payroll taxes, workers’ compensation, health insurance, and benefits all add extra costs, collectively known as labor burden. One should not ignore the labor burden, a job that seems profitable on paper could lose money when all labor costs are included.

This strategy ensures that teams are paid correctly and the costs are allocated fairly to each project.

Pillar 2: Retainage Management

Retainage is a portion of a contractor’s payment (which is usually 5–10%) that the project owner holds back until the work is completed. This hold back protects the owner, and let’s contractor finish the project correctly.

For contractors, retainage affects the cash flow and project planning. Understanding retainage is essential for managing finances and estimating project timelines.

Retainage Receivable vs. Retainage Payable

It is important to record retainage correctly in your accounting system. Retainage receivable is the money you are owed by clients, while retainage payable is money you owe to subcontractors or vendors. Misunderstanding these amounts can affect your cash flow, making a project appear more profitable or liquid.

Pillar 3: WIP Reporting

A Work-in-Progress (WIP) report shows the financial status of ongoing construction projects. This includes costs, revenue, and the percentage of work completed for each job. Contractors use the report to see if a project is making money, covering its costs, or running over budget.

Avoiding Over- and Under-billing

The WIP report helps contractors find billing problems. They can compare actual costs with billed amounts, that spots overbilling or underbilling early. With a good report contractors get a clear picture of each project’s financial position and manage cash flow more effectively.

^{Essential Financial Processes and Best Practices}

The construction industry faces many challenges, like tight budgets, delayed payments and complex regulations. To handle these effectively, we’ve listed some best financial practices that help track costs and manage cash flow.

Choosing the Right Accounting Method

Contractors use different accounting methods depending on the size and duration of their projects.

• Cash basis records income when you receive it and expenses when you pay them. It works well for small projects with simple finances. Here, you get a clear view of the cash coming in and going out each month.
• Accrual basis records income and expenses when they occur, for example you finish a project in March but get paid in April. Accrual accounting records the income in March to show the true profit.  This method is better for larger or ongoing projects because it shows the real profit and cost of each job.
• Percentage-of-completion records revenue and costs as the project progresses. This is best for long-term projects that last several months. It helps track how much work is done, how much revenue you can report, and whether the project is on budget.

So, in short contractors should switch from cash to accrual or percentage-of-completion records when projects get bigger or require detailed reporting for taxes, lenders, or investors.

Managing Committed Costs and Change Orders

It is contractors' responsibility to track purchase orders (POs) and subcontractor commitments as soon as orders are made. This helps you see all upcoming expenses and prevents overspending. POs should be Treated as liabilities because they gives a clearer picture of your project budget and helps keep costs under control.

The Change Order Process

Change orders happen when the project idea changes. It is very important to record every change order as soon as it’s approved. One should document what work is added or removed, get written approvals from the client, and update the budget and accounting records immediately. This approach prevents the necessary disputes.

^{Chart of Accounts for Construction Companies}

A chart of accounts is basically a way to organize all your financial information. For construction companies, it works best when you break it down by project like codes for labor, materials, and subcontractor costs, and track liabilities like retainage and taxes. This setup makes it easier to see how each project is performing, spot overspending, and keep your finances clear and organized.

^{Technology and Professional Support}

Selecting the Right Tools

Generic accounting software makes construction bookkeeping difficult and confusing. Construction projects have unique needs, such as tracking job costs, retainage, and WIP reports, which a common software cannot handle.

Contractors benefit from accounting software that is specifically made for construction, that has a capability to handle project-level costs, invoicing, and reporting. The right tools save time, reduce mistakes, and give a clear picture of your company’s financial condition.

When to Hire a Pro

Some financial tasks are too complex to handle alone, especially for larger projects or multiple jobs at once. Hiring a specialized construction accountant or bookkeeper for your construction company helps with detailed reporting, tax planning, and managing complicated accounts.

Companies like Atheneum offer expert guidance that helps contractors make smart financial decisions, stay compliant, and focus on growing their business instead of counting numbers.

^Conclusion

Managing construction finances is challenging, but taking control of your accounting and bookkeeping is helpful. Track costs closely, manage retainage, and use WIP reports to see how every project is performing. It is also important to choose the right accounting method that handles all the tasks effectively and organize all your financial records. By actively managing your accounting, you help the company to grow, take on bigger projects, and earn more profit.

Book a free consultation call with our team to get smart accounting hacks that drives success in every project and will keep your business moving forward.