Construction accounting isn’t traditional accounting with a few project tags.
It’s a different ballgame entirely.
Jobs span months or even years. Costs move constantly. Cash flow is chaotic.
More importantly, the revenue recognition rules change depending on the contract structure, project stage, and billing terms.
Without a strong accounting system tailored to the construction industry, it’s nearly impossible to know where you stand until the money runs out or the IRS calls.
This guide is built for construction company owners who want structure, not just software.
- Job costing is non-negotiable in construction. Every dollar must be tied to a specific project to accurately track profitability and avoid margin blind spots.
- WIP reports help track earned revenue vs. billed amounts and prevent overbilling, underbilling, and surprise liabilities.
- Labor burden includes taxes and insurance, not just wages. Ignoring it distorts job costs and future staffing decisions.
- Subcontractor compliance requires W-9s, 1099 tracking, and timely classification; waiting until year-end invites penalties and rework.
- Progress billing provides a more accurate financial picture than completed contract methods, especially for multi-phase or long-duration projects.
Why Is Construction Accounting Different?
Most businesses sell products or services with predictable timelines and revenue recognition. Construction companies don’t have that luxury.
Here’s what makes construction accounting fundamentally more complex:
- Revenue isn’t earned all at once. Projects take time, often across multiple reporting periods.
- Costs shift daily. Labor, materials, equipment rentals, and subcontractors vary week to week.
- Cash flow is unpredictable. Clients pay based on milestones or approval cycles, not your needs.
- Each job is its own cost center. You need to track every project separately, down to the invoice.
In short, your books can’t just reflect your business.
They have to reflect every job and all the moving pieces within it.
Job Costing: The Heart of Construction Accounting
If you don’t track job-level costs, you’re not doing construction accounting. You’re guessing.
Every dollar that enters or leaves your company needs to be assigned to a specific job. That includes:
- Labor (including overtime and burden)
- Materials (by supplier and PO)
- Equipment usage (owned or rented)
- Subcontractor payments
- Permits, insurance, and administrative overhead
Job costing isn’t about logging expenses.
It’s about visibility.
And when done right, it tells you exactly:
- How profitable a project actually is
- Whether you’re underbidding or overdelivering
- Which teams, vendors, or processes are draining margins
We worked with a mid-sized GC based in Denver that had grown fast but was flying blind on project profitability. They had strong revenue, but cash flow was tight, and no one could tell which projects were making money. After implementing proper job costing in QuickBooks Desktop with class tracking and custom WIP reports, they discovered that 60% of the profit was coming from just 25% of jobs. That changed their entire bidding strategy.
WIP Reporting: Know What’s Earned vs. What’s Left
Work-in-progress (WIP) reporting is where most construction accounting falls apart.
Here’s why it matters: just because a contract is worth $500,000 doesn’t mean you’ve earned $500,000. WIP reports compare the percentage of work completed to the revenue recognized and the costs incurred.
A proper WIP report will show:
- Total contract value
- Costs incurred to date
- Percentage of completion (cost-based or manual)
- Revenue recognized to date
- Over/under billing position
If you’ve billed more than you’ve earned, you’re overbilled. That creates a future liability. If you’ve earned more than you’ve billed, you’re underbilled and may be floating the client.
Failing to track WIP accurately can wreck cash flow, distort your financials, and lead to tax issues. GAAP requires percentage-of-completion accounting for long-term contracts.
And even if you’re under the $25M revenue threshold and using the cash method for taxes, you still need to know where you stand.
Progress Billing vs. Completed Contract
Revenue recognition in construction hinges on how and when you bill.
| Aspect | Progress Billing | Completed Contract Method (CCM) |
|---|---|---|
| Revenue Recognition | Based on the percentage of work completed (accrual-based) | Only recognized when the entire project is complete |
| Cash Flow Visibility | More consistent cash flow tracking throughout the job | Cash flow often appears lumpy or misleading |
| Common Use Case | Commercial and government contracts, multi-phase jobs | Small, short-term residential projects |
| Documentation Required | Detailed records: timecards, change orders, delivery logs | Minimal during project; reconciliation happens post-completion |
| Tax Treatment | Income recognized as earned; aligns with GAAP | Tax-deferral strategy; doesn’t reflect real-time performance |
| Risk of Disputes | Higher if field and accounting teams aren’t in sync | Lower during project, but surprises at close-out |
| Impact on Reporting | Offers real-time insight into profitability and over/under billing | Delays profitability reporting; often distorts annual financials |
| Ideal For | Companies managing multiple jobs across reporting periods | Contractors intentionally deferring income or working on <1-year jobs |
Allocating Indirect Costs Without Distorting Profit
Direct job costs are easy to spot.
But indirect costs like insurance, supervision, fuel, small tools, or office overhead are trickier.
If you don’t allocate them properly, you end up with projects that look wildly profitable on paper but leave no cash in the bank.
Here’s the fix: set up a system to allocate indirect costs to jobs based on real drivers, labor hours, equipment usage, or contract value. Don’t just spread them evenly. Overhead isn’t a rounding error; it’s a silent margin killer if ignored.
We helped a construction firm with 11 ongoing projects discover they were under-allocating fuel and repair costs to heavy equipment jobs. A basic cost driver model added those expenses back to the appropriate jobs, correcting inflated margins and giving leadership a clearer view of where costs were really creeping in.
Subcontractor Payments and 1099 Compliance
Construction businesses rely heavily on subcontractors, and the IRS knows it. If your 1099 process is sloppy, you’re opening yourself up to audit risk.
Every subcontractor should be treated as a vendor with:
- A signed W-9 on file
- Clear contract terms
- Timely payments recorded with backup
- 1099-NEC filings issued for payments over $600 annually
Many construction companies still make manual payments or track vendor invoices in spreadsheets, which makes it easy to miss 1099 requirements.
We’ve seen situations where a client had to issue a dozen corrected 1099s in Q1 because tax IDs were wrong or payments were misclassified.
Our advice: collect W-9s before work starts, not after.
Integrate your accounts payable with your project management or estimating software if possible. And assign someone the responsibility for tracking contractor payments against annual limits.
Project-Based Payroll and Labor Burden
Construction payroll is complex by default. Between union rates, prevailing wages, job-specific pay codes, overtime, and multi-state taxation, even a small company can end up with messy payroll files that don’t match job cost reports.
But the real risk is underestimating the labor burden, which is the true cost of employing someone. That includes:
- Employer payroll taxes
- Workers’ comp
- Health insurance
- Vacation and sick time accrual
- Retirement benefits
- Training and onboarding
If you’re assigning only gross wages to jobs, you’re missing 20–35% of the actual labor cost.
We worked with a steel fabrication firm that was seeing labor costs come in below budget until they realized they were ignoring insurance and tax costs in their job costing.
Once the labor burden was correctly applied, they found that two of their largest jobs had crossed profitability thresholds weeks earlier than forecast.
The fix wasn’t software, it was structuring their accounting to match real operations.
What Real Construction KPIs Look Like
You don’t need 20 dashboards. You need a few metrics that tell the truth:
- WIP Over/Under Billing Position
- Gross Margin by Job
- Cash Flow Forecast by Project Phase
- Labor Cost per Earned Revenue Hour
- Revenue Backlog (signed contracts not yet started)
- Variance Between Estimated and Actual Job Costs
If you don’t review these weekly or bi-weekly, you’re driving your business through the rear-view mirror.
Construction finance doesn’t reward those who wait for month-end.
We use structured reporting models at Ledger Labs that tie these metrics into your job-level accounting.
Every number flows from your real operations, not just QuickBooks exports.
How Ledger Labs Helps Construction Businesses Build Control?
Most construction businesses don’t need a new tool.
They need a new system.
At Ledger Labs, our accounting services offer customized structures for construction companies seeking enhanced visibility, more predictable cash flow, and clearer reporting. That means:
- A job-centric chart of accounts
- Real-time job cost tracking
- WIP reports that don’t need spreadsheets
- Payroll systems that map to actual projects
- Monthly closes tied to project progress
- Tax-ready records for both contractors and employees
Whether you’re a general contractor, a niche subcontractor, or a rapidly growing builder, our team structures your accounting to support the way your field teams operate.
Because if your numbers don’t match the job site, they’re not helping you build.
Also Read: Accounting For Restaurants
Conclusion
It’s not about how big your firm is. It’s about how well your numbers match reality.
Construction companies collapse when they mistake revenue for progress and cash flow for profit. But when your accounting system is structured around projects, timing, and actual costs, you don’t just stay compliant, you stay in control.
Ledger Labs works with construction business owners who want financial systems that scale as predictably as their build schedules. If your books still feel like a scramble after every close, it’s time to get serious about structure.
And if you also need a robust accounting structure for your construction company, you need to book a call with us. We will walk you through all parts of streamlining your books and how we can improve them for you.
