Construction accounting is operationally intensive and structurally different from general business accounting. Job costing, WIP schedules, percentage-of-completion revenue recognition, AIA billing, retainage, lien waivers – each has specific mechanics. This guide covers what construction accounting actually requires.
Every construction accounting decision traces back to job costing. Generic bookkeeping treats a construction company's expenses as firm-wide overhead; construction accounting assigns every dollar of cost to a specific job. The difference is the difference between useful construction P&L and useless noise.
Construction chart of accounts has two dimensions beyond standard:
Combination produces job-level cost tracking: Job 2026-14 – Labor – Carpentry – $24,500. This granularity enables: cost-vs-budget variance per job, margin analysis per job, contractor performance analysis.
Generic QBO works for contractors under $2M annual revenue with simple jobs. Beyond that, construction-specific software is almost always warranted.
Construction revenue recognition under ASC 606 typically uses percentage-of-completion (POC) for long-term contracts. Alternative: completed-contract method for short-duration contracts.
POC recognizes revenue based on project completion percentage, typically measured as cost-to-cost: costs incurred / total estimated costs = % complete. So a project where $280k of $700k total estimated costs have been incurred is 40% complete, triggering recognition of 40% of contract revenue.
The WIP schedule is the construction controller's primary monthly deliverable. For each active project, it shows contract value (original + approved change orders), estimated total cost, estimated gross profit, costs incurred to date, percentage complete, revenue earned to date, billed to date, and overbilling / underbilling.
Overbillings (billings exceeding earned revenue) are liabilities – contractor has been paid for work not yet completed. Underbillings (earned revenue exceeding billings) are assets – work completed but not yet billable. Bank and surety review both for risk assessment.
AIA Document G702/G703 is the standard commercial construction billing format. Each month, contractor submits Application for Payment showing scheduled value per line item, work completed this period, total work completed to date, materials stored, retainage, and current amount due.
AIA billing has conventions that generic bookkeeping doesn't handle: specific line item breakdowns must match the schedule of values agreed in the contract; changes require change order approval before billing; architect/engineer approval required before owner pays.
Retainage is a percentage of each billing withheld by the owner until project completion. Typical: 10% retainage on first 50% of contract, sometimes reducing to 5% thereafter. Released at substantial completion or final completion.
Accounting: retained amounts sit as AR but not immediately collectible. Aging requires separate tracking. Most contractors show retainage receivables as a separate AR subcategory.
Before paying contractors and subcontractors, owners typically require lien waivers – signed documents waiving mechanic's lien rights on amounts paid. Accounting tracks lien waivers alongside payments to document protection status.
Contractor payment to subs often tied to contractor's own payment from owner. Pay-when-paid: sub gets paid when contractor gets paid (valid but timing-based). Pay-if-paid: sub only gets paid IF contractor gets paid (creates real risk transfer; enforceability varies by state).
Related: construction industry page, construction case study, offshore bookkeeping.
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