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You bid on a big job. You win it. You work hard for six months. Then you find out you lost money. How? You did not track costs per job. This happens to more than half of contractors. Do not let it happen to you.
What Does Accounting for Contractors Mean?
Accounting for contractors is not like regular business accounting. You need special tools. You need job costing. You need progress billing. You need retainage tracking. You need work-in-progress schedules. Without these tools, accounting for contractors does not work. You cannot see true job profit. You risk running out of cash. This guide shows the methods used by profitable construction firms along with the type of assistance they take from professional accounting services to give their business the solid foundation it needs to scale.
The Two Main Accounting Methods Contractors Must Know
When you do accounting for contractors, you pick a method based on standards like those outlined by the Internal Revenue Service (IRS). You choose cash basis or accrual accounting. Each method changes how you record income and expenses. Choosing the right method is the first step in accounting for contractors.
Cash basis
You record income when money hits your bank account. You record expenses when you write the check. It is simple. It works for very small contractors. But it hides the real picture. A project may look profitable because you got a big deposit. But the materials bill has not arrived yet. You might spend that cash and later struggle to pay the supplier. For basic accounting for contractors, cash basis works only at small scale.
Accrual basis
You record revenue when you bill the client. It does not matter when they pay. You record expenses when you get the materials or when the work is done. It does not matter when you pay the bill. This matches income to the work done. It shows job profit in real time. Banks, sureties, and large clients often ask for accrual accounting. For serious accounting for contractors, accrual is the standard.
Feature | Cash Basis | Accrual Basis |
Revenue recorded | When cash is received | When earned (billed) |
Expenses recorded | When cash is paid | When incurred (invoice received) |
Best for | Sole proprietors, small jobs under $1M | Established contractors, bonding needs, growth |
Visibility of job profit | Delayed until all cash flows | Immediate with job costing |
Complexity | Low | Moderate |
The Three Core Financial Statements for a Construction Company
Accounting for contractors needs three core financial statements. You use all three to run your business well.
Balance sheet
The balance sheet shows what you own and owe on a set date. Assets include cash, accounts receivable, equipment, and retainage receivable. Liabilities include loans, credit card balances, and unpaid subcontractor bills. Subtract liabilities from assets and you get your equity. A strong balance sheet helps you get bonding. In accounting for contractors, the balance sheet is your base.
Income statement
The income statement tracks profit over time, like a month or a full year. It starts with total contract revenue. You subtract direct labor, materials, and subcontractor costs to get gross profit. Then you subtract overhead like rent, insurance, and office wages to get net profit. Accounting for contractors needs a clean, accurate income statement every period.
Statement of cash flows
This statement shows why your bank balance drops even when you show a profit. It breaks cash into three groups:
- Operating activities: cash from invoices collected and bills paid.
- Investing activities: buying or selling equipment.
- Financing activities: loans, owner investments, or draws.
Many contractors run low on cash even with profit on the books. This report tells you where the cash went. Cash flow review is a key part of accounting for contractors. If tracking these daily numbers becomes overwhelming, a virtual bookkeeping assistant can ensure your records stay flawless without adding to your overhead.
What is meant by Job Costing?
Job costing is an essential accounting approach, widely recognized by financial educators like NetSuite, where you assign every cost to a specific project. Without it, you only know total business profit. You do not know which jobs made money and which lost money. Job costing is the heart of accounting for contractors.
How to set it up
- Create a unique job number for each project.
- Use accounting software that lets you use cost codes like labor, materials, subs, and equipment.
- Enter all purchase orders, time cards, and subcontractor invoices with that job number.
What to track
- Direct labor: hours your employees work on that job. Include wages, payroll taxes, and workers’ comp.
- Materials: lumber, concrete, fixtures, and other items delivered to that job.
- Subcontractors: electricians, plumbers, and others billed directly to the job.
- Equipment rental: machines used only for that project.
- Permits and fees that are specific to the job.
The profit formula per job
Contract price – Total direct job costs = Gross profit per job.
Gross profit – Allocated overhead = Net profit per job.
Without job costing, accounting for contractors is incomplete.
What is a Work In Progress Schedule and How to Create it?
A Work In Progress (WIP) schedule is a report made only for construction. It shows the financial health of jobs that are still open. Lenders and sureties ask for it. It also stops you from claiming too much profit too early. In accounting for contractors, the WIP schedule is non‑negotiable.
Key columns in a WIP schedule
- Contract value (original plus approved change orders)
- Costs incurred to date
- Total estimated costs (incurred plus remaining)
- Percentage of completion = costs incurred ÷ total estimated costs
- Earned revenue = percentage of completion × contract value
- Billed to date
- Underbill / Overbill = earned revenue – billed to date
Example simplified WIP table
Job | Contract | Costs to Date | Total Est. Costs | % Complete | Earned Revenue | Billed | Under/(Over) Bill |
Job A | $250,000 | $90,000 | $200,000 | 45% | $112,500 | $80,000 | $32,500 underbill |
Job B | $180,000 | $140,000 | $175,000 | 80% | $144,000 | $160,000 | ($16,000) overbill |
Underbill is an asset. It means you have earned more than you billed. Overbill is a liability. It means you have billed more than you earned. Mastering the WIP is essential for accounting for contractors.
How to Handle Retainage as a Contractor?
Retainage is money the client holds back until the job is fully done. It is often five to ten percent of each progress payment. You have earned it, but you cannot collect it yet. Retainage is a unique challenge in accounting for contractors.
Accounting treatment
- When you invoice, record the full amount as accounts receivable.
- Right away, split out the retainage part into a separate account called retainage receivable.
- When the job finishes and you get the retainage, move it from retainage receivable to cash.
Why it matters
If you ignore retainage, you will think your accounts receivable balance will be collected soon. That leads to cash flow surprises. Track retainage per job so you know exactly when you expect that money. Proper retainage handling separates good accounting for contractors from poor accounting.
How to Calculate Equipment and Depreciation Amounts?
Equipment is often the second largest asset after work in progress. Depreciation spreads the cost over the useful life of the asset. It is a non‑cash expense. It lowers your taxable income but does not take money out of your bank. Depreciation is often overlooked in accounting for contractors.
Fixed asset register
List every piece of equipment worth over $500. Include:
- Purchase date
- Cost
- Useful life (for example, 5 years for trucks, 7 years for heavy machinery)
- Accumulated depreciation
- Net book value
Charging equipment to jobs
Do not leave equipment costs in overhead. Instead, figure out an hourly or daily rate that covers:
- Fuel
- Repairs and maintenance
- Insurance
- Depreciation
When a job uses your excavator for 20 hours, charge the job that rate. This makes job costing accurate. It also stops equipment costs from hiding in overhead. Accurate equipment costing is part of solid accounting for contractors.
Advanced Overhead Allocation Strategies For Contractors
Most contractors just add a flat percentage to bids. That works but it is not precise. A better way is to allocate overhead based on direct labor dollars or hours. This is a sophisticated approach to accounting for contractors.
Calculate your overhead rate
Total annual overhead ÷ Total direct labor dollars = Overhead rate as a percentage.
Example: Overhead = $200,000. Direct labor = $400,000. Rate = 50%.
Every dollar of direct labor on a job should carry $0.50 of overhead in the bid.
Burden rate for employees
Beyond wages, each employee has a burden. Payroll taxes, workers’ compensation, health insurance, and retirement contributions add up. Calculate the total annual burden for a field employee. Divide by billable hours to get a true hourly cost.
Example: A carpenter earns $30/hour. Burden adds $15/hour for taxes, comp, and benefits. True cost = $45/hour. If you bid $50/hour, you only make $5/hour for overhead and profit. That is likely too thin.
Indirect job costs
Some costs are not direct but are still job‑specific. A superintendent’s salary is an example if they split time across jobs. Allocate those costs using a key. You can use hours worked per job or percentage of total direct labor. This stops those costs from being buried in overhead. It also makes each job’s profit more accurate. These advanced tactics take accounting for contractors to the next level.
Conclusion
You now have the tools to fix your contractor accounting. Job costing, WIP schedules, retainage tracking, and change order discipline will save you from losing money on good‑looking jobs.
So, open your accounting software right now. Create a job number for every open project. Enter all costs from this week. Do that every week. If you feel stuck, consider hiring a bookkeeper or an accounting virtual assistant who knows construction. Your bank account will thank you.
FAQs
1. What is the best accounting software for contractors?
QuickBooks Online with a construction‑specific add‑on works for many. Larger firms use Sage 100 Contractor, Foundation, or Viewpoint. Look for job costing, progress billing, and retainage tracking. Choosing the right software is an early step in accounting for contractors.
2. How do I calculate my overhead rate for bidding?
Add up all annual overhead expenses. Office rent, insurance, admin salaries, utilities, and similar costs go in the total. Divide by your total direct labor cost or total revenue. Apply that percentage to every bid. Overhead calculation is a core skill in accounting for contractors.
3. What is a certified payroll report?
It is required for public works projects under labor laws like the Davis-Bacon Act (U.S. Department of Labor). It reports each employee’s wages, fringe benefits, and work classification. You must submit it weekly. It is often posted publicly. Certified payroll is a compliance issue within accounting for contractors.
4. How do I account for client deposits?
Record client deposits as a liability on the balance sheet. Call it customer deposits. When you invoice, apply the deposit to reduce accounts receivable. Do not record it as revenue until you have earned it. Handling deposits correctly is part of ethical accounting for contractors.
5. When should I switch from cash to accrual accounting?
Switch when your annual revenue passes $1 million. Also switch if a bank or surety asks for it. Switch if you have multiple jobs running at the same time and you need accurate profit per job. The timing of this switch is a major decision in accounting for contractors.
