Building a Solid Foundation: 7 Key Accounting Practices Every Construction Firm Should Follow

 Money management is as important in the construction industry as project management.  Construction organizations have to handle a large number of projects, fluctuating costs, and extended schedules.  Even successful enterprises may go out of control without proper financial management and accounting procedures.

The results of the 2024 Global Construction Survey provided by Deloitte revealed that the global construction market is projected to grow from US$11.39 trillion in 2024 to US$16.11 trillion by 2030. As U.S. Bank research revealed that an incredible 82 % of businesses that fail do so due to cash-flow issues- further illustrating the importance of proper accounting to achieve long-term success.

Here are the 7 key accounting practices that Every Construction Firm Should Follow for financially sound future.

1. Implement Job Costing: The Cornerstone of Construction Accounting

Job costing is the most vital practice for any construction business. It’s the process of tracking the revenue, costs, and profitability of each individual project.

Why it’s non-negotiable:
Without detailed job costing, you’re flying blind. You might think you’re profitable overall, but one or two bad jobs could be bleeding you dry. A survey by QuickBooks found that 66% of construction businesses consider job costing critical to their success.

How to do it right:

• Break down costs by category: Track labor, materials, subcontractors, and equipment for each job.
• Use specialized software: Modern construction accounting software can track costs in real-time, allowing you to compare actual spending against your estimates instantly.
• Review regularly: Don’t wait until the project is over. Hold weekly reviews to identify cost overruns early and take corrective action.

2. Choose the Right Accounting Method: Cash vs. Accrual

This is a fundamental decision that impacts how you view your company’s financial health.

• Cash Basis: You record revenue when you receive cash and expenses when you pay them. It’s simple but can be misleading for construction companies with long-term projects.
• Accrual Basis: You record revenue when you earn it (e.g., when you bill for a completed project phase) and expenses when you incur them. This gives a more accurate picture of profitability during a project.

Expert Recommendation: For most construction companies, the accrual method paired with Percentage-of-Completion (POC) accounting (see below) is the industry standard for accurate financial reporting.

3. Master Percentage-of-Completion (POC) Revenue Recognition

How do you recognize revenue for a project that takes 18 months to complete? Recognizing it all at the end is a disaster for financial management. The POC method allows you to recognize revenue and expenses proportionally as the project progresses.

How it works:
You bill your client based on the percentage of the project that is complete. This smooths out your income statement and provides a realistic view of earnings throughout the year. This practice is crucial for securing bonding and impressing lenders who want to see steady, predictable revenue.

4. Meticulous Change Order Management

Change orders are a reality in construction, but poorly managed, they can destroy your profit margin. The Construction Industry Institute reports that inadequate change management can reduce productivity by up to 30%.

Best Practices Change Order:

•           Make it a formal procedure: All changes should be written down, calculated properly and signed by the client before any work is done.

•           Status with job costing: Have the added revenue and cost of the change order added to your job cost system at once.

•           Be straightforward: Don’t invite controversy: make the client aware of the price and the effect of the change.

5. Proactive Cash Flow Forecasting

Profit on paper doesn’t pay the bills—cash does. Construction is infamous for uneven cash flow. You have to pay for materials and labor long before you receive a payment from the client.

Create a Rolling Cash Flow Forecast:

• Project Inflows: List all expected client payments based on your billing schedule.
• Project Outflows: List all upcoming expenses: payroll, subcontractor payments, material deliveries, and overhead.
• Identify Gaps: This forecast will show you when you might face a cash shortage, allowing you to arrange for a line of credit or adjust your billing cycle in advance.

6. Detailed Retention Tracking

Retention (typically 5-10% of the contract price held back until project completion) is a standard practice. However, many construction companies lose track of these funds, treating them as lost money.

Track Retention Like a Pro:

• Record it as an asset: In your books, retention should be recorded as “Accounts Receivable – Retention.” It is money you have earned but not yet received.
• Age your retention receivables: Create a report that shows how long each retention payment has been outstanding. Follow up diligently as project close-out dates approach.
• For context, a report by Levelset found that 69% of construction businesses have over 10% of their annual revenues tied up in retention at any given time. Proper tracking is essential to reclaiming this capital.

7. Accurate Work-in-Progress (WIP) Reports

A WIP report is the ultimate dashboard for your financial management. It’s a consolidated report that combines job costing, POC calculations, and billing information.

What a WIP Report Tells You:

• The financial health of every active project.
• Whether you are over-billed (you’ve billed more than the earned revenue) or under-billed (you’ve earned more than you’ve billed).
• Overall company profitability to date.

Lenders and surety bond agents rely heavily on WIP reports to assess your company’s risk. Accurate WIP reporting is a sign of a sophisticated and well-managed construction firm.

Build Your Business on a Strong Financial Foundation

Applying these seven accounting practices is not simply a bookkeeping practice, but rather a financial management strategy. In the case of construction companies, this type of accounting specialization is what distinguishes between those companies that are thriving and those that cannot even survive. Making these practices will provide you with the transparency and discipline that allows you to become a smarter bidder, run projects better and create a business that will last.