Bookkeeping for Construction Companies: 6 Tips from Our Accountants

Margins in the construction industry are tight. Between fluctuating material costs, change orders, retainage and subcontractor billing, your books are working overtime just to keep up. One mistake, like misclassifying job costs or skipping proper retainage tracking, can snowball into lost profits or even compliance issues. That’s why bookkeeping for construction companies requires a sharper pencil than most industries.

At James Moore, we’ve seen firsthand how much better a construction company runs when its books are tailored to the way contractors actually do business. Smart construction bookkeeping means using the right tools, asking the right questions and avoiding common traps.

These six tips come straight from our team of construction-savvy accountants who’ve helped businesses like yours tighten up operations and gain peace of mind.

1. Know the difference between cash and accrual accounting

If you’re running a construction business, the way you recognize income matters. This is especially true once your company crosses the $31 million revenue mark (indexed by average annual gross receipts over the past three years). At that point, the IRS requires you to use accrual-based accounting unless you qualify for certain exceptions. Even before that threshold, using the accrual method often paints a more accurate picture of your profitability.

So what’s the difference? Cash accounting records income and expenses when money actually changes hands. Accrual accounting, on the other hand, records income when it’s earned and expenses when they’re incurred regardless of when cash moves. For construction companies juggling retainage, progress billings and project timelines that span months or years, accrual accounting typically makes more sense.

Here’s an example. Let’s say you bill 30% of a job this month but won’t receive payment until next month. With cash accounting, that income doesn’t show up until it hits your bank account. With accrual, it’s recorded the moment you complete the work. That distinction can affect your ability to see profitability by project, manage your tax liability and secure financing.

If you’re not sure which method you’re using or should be using, the IRS has outlined the basic requirements and exceptions for construction accounting methods here.

Tip from our team: Even if you’re eligible to stick with cash accounting, talk with your CPA about whether accrual could help you make smarter decisions.

2. Set up your chart of accounts the right way

Think of your chart of accounts (COA) as the blueprint for your books. When it’s well structured, you can track income, expenses, assets and liabilities in a way that tells the real story of how each project is performing. When it’s not, your financial reports get muddy and you’re left guessing at where profits are leaking.

Most off-the-shelf COAs are built for general businesses. Construction companies need more detail. Your COA should be tailored to support job costing, with separate accounts for labor, materials, subcontractors, equipment rental, overhead allocation and indirect costs. It should also be flexible enough to handle different project types, retainage and work-in-progress tracking.

A good rule of thumb is to break down accounts by cost type and assign them to job-specific codes. For example, you might have a payroll expense account tied to labor and subcategories for field crew versus office staff. This makes job costing more accurate and financial reporting more meaningful.

We’ve helped construction businesses overhaul their COAs to reflect the reality of how their work gets done. And the results are clear: faster month-end closeouts, more accurate bids and fewer surprises.

Pro tip: Review your chart of accounts with your CPA at least once a year. As your business grows, your COA should grow with it.

3. Use job costing to track profit per project

If you can’t measure it, you can’t manage it — and nowhere is that truer than in construction. Job costing is the backbone of accurate construction accounting. It tells you what each job is costing you in real time so you can manage labor, materials, overhead and subcontractors with precision.

Here’s how job costing works. Every transaction is coded to a specific project and a specific cost category. That means you know exactly how much you’ve spent on framing labor for Job A versus Job B. You also know if your estimates are holding up or if you’re drifting off budget. And when a client asks why a change order added $15,000 to the total, you can back it up with real numbers.

Construction companies sometimes fail not because they don’t have work, but because they can’t control costs across multiple jobs. Some essentials to get it right:

• Assign job numbers to every project and use them consistently
• Code every invoice and expense to the correct job and cost type
• Compare actuals to estimates regularly to identify overages
• Review labor costs weekly to catch issues early

Software can help, but the process matters more. A strong job costing system lets you bid smarter, manage risk, and build trust with clients and lenders.

4. Don’t let retainage payments mess up your cash flow

If you’ve worked in construction for more than five minutes, you know how retainage can throw a wrench into your cash flow. That 5% to 10% withheld from your invoices may seem small on paper, but it adds up fast across multiple projects. And if you’re not tracking it correctly in your books, it can distort your profit reports and put unnecessary pressure on your working capital.

Retainage is meant to protect project owners by holding back a portion of payment until the job is completed to their satisfaction. For contractors, it can feel like working for free for weeks or even months. Too often, companies treat retainage as “lost in the shuffle” money. It gets recorded late or not at all, making it harder to forecast income and stay ahead of liabilities like payroll, materials and equipment costs.

Smart bookkeeping for construction companies means recording retainage receivable separately from regular accounts receivable. This gives you a clear picture of what’s been earned but not yet collected. You’ll also want to track the release of retainage per contract terms so you know when to follow up and when to escalate.

We’ve worked with contractors who were unintentionally writing off thousands in unreleased retainage because their books weren’t set up to track it. Once we put the right system in place, they gained better visibility and tighter control over collections.

5. Choose construction-friendly accounting software

The software you choose can make or break your bookkeeping process. Many platforms are designed for general businesses. While they might work for a bakery or boutique, they fall short when you’re dealing with job costing, progress billings, subcontractor payments and retainage tracking. Construction bookkeeping is project accounting.

When evaluating software, look for features tailored to your world. You’ll want:

• Detailed job costing with cost codes and real-time tracking
• Support for retainage and partial billings
• Integration with payroll systems that handle union and certified payroll
• Project-based financial reports that compare budget to actual

Some of the more widely used options among construction companies include Intuit Enterprise Solutions, Viewpoint, Sage and Foundation. Each has pros and cons, so it’s important to choose the one that aligns with your size, workflow and reporting needs.

Also consider who is using the software. If your field crew or project managers are expected to input data, the system should be user friendly and mobile accessible. Otherwise, you risk errors and incomplete records that bog down your entire operation.

6. Better bookkeeping for construction companies starts with better decisions

Proper bookkeeping for construction companies creates systems that bring clarity, support strong decision-making, and build a more stable future for your business. From choosing the right accounting method to tracking retainage and picking the right software, each step plays a critical role in protecting your margins and unlocking growth.

James Moore’s Construction Services team works shoulder to shoulder with construction business owners who want to get their financials right the first time. We know the field, we know the pitfalls, and we know how to turn your books into a tool that works for you, not against you.

If you’re ready to improve your construction bookkeeping process, gain confidence in your numbers, and stop losing revenue to preventable issues, contact a James Moore professional. We are ready to roll up our sleeves and help you build something better.

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.