Guide to Construction Accounting Methods for Growing Contractors

When it comes to running a successful construction company, you probably spend a lot of time thinking about timelines, subcontractors and equipment. But construction business failures are often tied to financial mismanagement, not field performance. That’s why the accounting method you choose is more than just a bookkeeping decision. It shapes how you view your business, pay your taxes and make critical decisions for growth.

Knowing your accounting method options helps you make informed choices that align with your long-term strategy.

Why construction accounting methods matter

The construction industry doesn’t operate on predictable schedules or standardized contracts. Instead, it relies on long-term projects, progress billing and fluctuating costs. In this environment, standard accounting practices often fall short. Specialized construction accounting methods provide the structure and flexibility needed to reflect actual performance and financial health.

Construction delays affect revenue recognition, cash flow and profit reporting. When payments are spaced out over months or even years, the right accounting method becomes essential to maintaining visibility and control over your numbers.

The IRS acknowledges this complexity by offering several accounting methods tailored for construction. Depending on your contract length, business size and project type, you may use the cash method, accrual method, completed contract method, percentage-of-completion method or other IRS approved method (there are many). Each method has unique tax implications and affects the timing of your income recognition and expenses.

This decision matters. Choosing an inappropriate method can lead to tax mismatches, misstated earnings or audit exposure. Conversely, a well-suited method can defer taxes, improve loan eligibility and create consistency across project reporting.

Accounting in construction should not just be about balancing books. It should be a tool to help owners and CFOs make smarter business decisions. When your numbers reflect the real state of your operations, you can bid more competitively, plan more effectively and avoid financial surprises.

 

 

Overview of primary construction accounting methods

Construction accounting is not one-size-fits-all. The method you choose needs to reflect how your business operates and the types of contracts you manage. Here are the four most common methods used by construction companies, along with the pros, cons and ideal use cases for each.

Cash method

The cash method records income when received and expenses when paid. It is simple and provides a clear picture of cash flow. However, it may not reflect the true financial performance of long-term projects.

Pros:

• Easy to implement and understand
• Ideal for small contractors with few long-term jobs
• Allows for timing flexibility on income and expenses

Cons:

• Not allowed for larger contractors with average annual gross receipts over IRS thresholds
• May cause income swings that complicate year-over-year comparisons

Accrual method

This method recognizes income when earned and expenses when incurred, regardless of payment timing. It offers a more accurate picture of profitability but can create cash flow blind spots. Mid-sized construction firms generally choose between percentage of completion method (PCM) or completed contract method (CCM). We explain both of these below.

Pros:

• Required for certain business types under IRS rules
• Provides a clearer match between revenue and expenses
• Better suited for companies with substantial inventory or credit transactions

Cons:

• Requires more sophisticated accounting processes
• Can show profits when cash is tight

Completed contract method (CCM)

Under CCM, income and related expenses are recognized only when a contract is completed. This defers revenue and taxes to the year the job finishes.

Pros:

• Useful for projects completed within two years
• Helps defer taxable income
• Compliant for smaller contractors under certain IRS rules
• Generally only used for tax preparation/filing purposes

Cons:

• Revenue deferral can mislead financial statement users
• Not allowed for larger contractors or certain long-term projects

Percentage-of-completion method (PCM)

This method recognizes revenue and expenses as work progresses, typically based on costs incurred or milestones met. It aligns closely with actual performance and is required for many large contractors.

Pros:

• Offers financial accuracy and predictability
• Required for many long-term contracts
• Ideal for firms managing multiple ongoing projects

Cons:

• Complex to implement and maintain
• May accelerate tax liabilities

Choosing the best method depends on your project timelines, financial goals and IRS thresholds. For many contractors, CCM and PCM are the most relevant.

Choosing between completed contract and percentage of completion

If your business handles projects that span more than one tax year, the IRS generally requires the percentage-of-completion method unless you qualify for an exception. This makes the decision between CCM and PCM a critical one for tax strategy and financial visibility.

The completed contract method is often preferred for its ability to defer taxes. By waiting to recognize income until a project is done, you may delay your tax burden into a future year. This can be especially beneficial when income spikes from project completion would otherwise push you into a higher tax bracket.

However, that same deferral can create misleading financial statements. Banks and bonding agents may view your income as unpredictable, even though your operations are stable. In industries where credit matters, this perception can affect lending terms or bonding capacity. This is why companies with more sophisticated accounting processes keep their internal books on PCM basis before converting to CCM for tax return preparation.

The percentage-of-completion method offers transparency. It allows stakeholders to see how much revenue and profit you have earned based on the actual progress of your work. This method aligns with Generally Accepted Accounting Principles (GAAP) and is often required on government contracts and the IRS requires filing tax returns on PCM basis for contractors with average annual gross receipts over $30 million.

Choosing the right method means balancing tax planning with operational clarity. We’ll discuss this in a little more depth later.

In our experience, mid-sized contractors often benefit from a hybrid approach, applying PCM to their internal accounting records while reserving CCM for tax filing on contracts that qualify. When paired with proactive tax planning, this approach helps contractors better manage income fluctuations and stay in control of their financial narrative.

 

 

Hybrid and alternative methods for mid-sized construction firms

Mid-sized construction firms often face a tricky mix of contract sizes, timelines and client demands. In these cases, a hybrid accounting approach can provide the flexibility needed to accurately reflect operations while staying compliant with IRS rules.

A hybrid method blends elements of the cash and accrual systems. For example, a company might use the cash method for most expenses and accrual for materials or subcontractor costs that span multiple periods. This can help balance accurate reporting with simplified cash tracking.

That said, hybrid methods demand careful recordkeeping and strong internal controls. You must track which contracts use which method and ensure consistency from year to year. Any errors can trigger IRS scrutiny, especially if tax deferral is involved.

For growing firms, this kind of flexibility is often not just helpful, but necessary. Our construction outsourced accounting services are built with these situations in mind. We help clients implement hybrid methods that align with business goals, streamline compliance and improve reporting clarity. From setting up project-level accounting policies to integrating methods with your software systems, our team can guide you every step of the way.

IRS compliance, financial reporting and tax strategy

No matter which method you choose, your accounting practices must comply with IRS regulations. For construction firms, this means understanding thresholds, recordkeeping requirements and the consequences of improper income reporting.

The IRS requires the percentage-of-completion method for contractors with average gross receipts over $30 million over the last three years on long-term contracts. Contractors who fail to meet this requirement can face penalties and interest for misreporting income.

Tax compliance aside, construction accounting methods also shape how your business is perceived. Banks, investors and bonding companies review financial statements to assess creditworthiness and risk. Using a method that overstates or understates earnings may affect your access to capital.

For example, reporting revenue only upon project completion can depress income in one year and spike it in another. This pattern might raise concerns about income stability, even if your operations are healthy. On the other hand, a percentage-based approach provides a steady view of financial performance, which can support better loan terms and stronger bonding capacity.

Financial reporting is also critical for internal decision-making. Knowing your true job costs, profit margins and backlog value helps you manage resources more effectively. It also allows for better tax planning. For instance, if you know a large project will complete near year-end, you may want to time certain purchases or compensation to offset taxable income.

Trusted resources like the Tax Policy Center and GAO.gov offer insights into how accounting rules and tax policy affect construction businesses. Staying informed can help you avoid missed opportunities and stay ahead of regulatory changes.

Construction firms should regularly evaluate their accounting methods to ensure both compliance and strategic alignment. This includes understanding how tax rules affect project profitability, reviewing year-end timing strategies and making informed adjustments as the business grows or shifts focus.

Construction accounting methods: Choose wisely for better outcomes

Choosing the right construction accounting method affects not only your tax bill but also how lenders, bonding companies and investors view your business. The best approach is not always the most aggressive or the most conservative. It’s the one that aligns with your operational needs, contract mix and long-term objectives.

The right method is made even more effective by staying informed about IRS thresholds, documenting your method choices, updating them as your business changes, and knowing when to adjust your approach to support financial strength and tax efficiency.

To make sure your accounting method is helping you meet your goals, contact a James Moore professional. With our extensive experience with construction accounting, financial reporting and tax strategy, we can help you build a stronger financial foundation.

Visit the James Moore website to learn more about our accounting and controllership services tailored to the construction industry.

 

 

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.