Construction Accounting for Shops That Aren't Sure They're Making Money

Read This First

Most construction businesses don't make it. Only 35.9% of construction companies founded in March 2011 were still operating by March 2022, and poor cash-flow management is a major reason why.[7] The fix isn't a fancier accounting system. It's answering two questions you can start on this month: [does each individual job make money](/articles/why-you-keep-underpricing-jobs), and when does the cash from that job actually hit your account. Most struggling shops can't answer either one, and that's exactly why they stay struggling.

Every Job Is Its Own Little Business

Here's what makes construction different from a shop with a fixed storefront. Your business isn't one operation. It's a stack of separate short-term profit centers, one per job, each with its own labor, materials, and site conditions.[5] A retailer sells the same product from the same location. You bid a bathroom remodel on Tuesday and a deck on Thursday, and the two jobs have nothing in common except your truck.

That's why job costing is the first thing to get right. Job costing means tracking the actual costs of each project separately, so you know per job whether you made money or lost it.[5] Without it, you're looking at one lump number in your bank account at the end of the month and guessing. Maybe the deck carried you and the remodel bled cash. You'd never know. You'd just book the next remodel at the same price and lose again.

This isn't a theory problem. The Construction Financial Management Association's 2023 survey found that 76% of construction companies tracking costs at the job level reported improved project profitability, compared to just 34% of those relying on general, company-wide accounting.[5] [The number that matters isn't your total revenue. It's whether each job cleared its own costs.](/articles/break-even-point-formula) Track labor, materials, and the cost of moving equipment and crew to the site (mobilization costs) against what that specific job brought in.[5] Do that for three months and you'll see which kinds of work actually pay you and which quietly don't.

The Part That Actually Puts Shops Under

This is the one nobody tells a new operator plainly. You can win the job, do the work well, invoice it correctly, and still go broke waiting on the money.

Profit on paper is not cash in the bank. In construction, contract terms commonly allow 30, 60, or even 90 days to pay an invoice, and retainage or disputes can stretch it further.[5] Retainage is money the customer holds back, a portion of every payment, until milestones are hit or the whole project is done.[6] So you've spent real cash on materials and payroll now, and the money to cover it shows up months later, if the schedule holds.

Here's what that looks like on one job. You invoice a bathroom remodel at $18,000: $6,500 in materials, $5,200 in labor, $700 in overhead. On paper that job just cleared $5,600 in profit. The client is on a 60-day pay schedule, so that $5,600 doesn't touch your account for two months, and by the time it does, you've already floated the crew and materials for your next two jobs out of pocket. The job was profitable. It still didn't help you make payroll this week.

It usually doesn't hold. A national study from Built, covering 250 general contractors and subcontractors, found 70% regularly face delayed payments.[4] The fallout is direct: over one-third of contractors, 35%, have seen projects canceled or significantly delayed because of financing gaps, and contractors inflate their bids by an average of 8% just to protect themselves against slow payment.[4] If projects are stalled, your money isn't working for you, it's working against you.

This is why a shop can be "busy" and still bounce payroll. The jobs are profitable and the cash timing is killing you. When you take on a new job, you're not just asking whether it pencils out. You're asking whether you can float the gap between spending your money and collecting theirs. A struggling operator who ignores that gap is one slow-paying customer away from being done.

When Contractors Actually Need Percentage-of-Completion Accounting

You've probably heard about percentage-of-completion accounting and work-in-progress schedules. Know what they are, but don't let them become your first project. The percentage-of-completion method recognizes revenue as a job progresses: spend $250,000 on a $1 million job and you're 25% complete, so you book 25% of the revenue.[7]

The tax code requires this method for long-term contracts, ones not finished in the year they start.[2] Getting out of that requirement takes two conditions together, not one: the contract has to be on track to finish within two years of when it started, and your average annual gross receipts over the prior three years have to fall under the IRS's small-contractor threshold, an inflation-adjusted figure around $31 million for 2025.[2][8] Most small trade shops clear that number without trying, but the two-year estimate by itself doesn't earn you the exemption. Home construction contracts run on a separate rule with no gross receipts test at all, exempt outright when at least 80% of the estimated cost goes to dwellings in buildings of four units or fewer.[2][3] A 2025 law, the One Big Beautiful Bill Act, widened that carve-out to more residential construction and stretched the completion window further for some of it, effective on contracts entered into after July 4, 2025.[2][9] The rules just changed, so [confirm your current thresholds and which exemption fits your contracts with a construction CPA](/articles/davis-bacon-act).

Here's the trap in the fancy version. Booked revenue is not collected cash. As one construction CPA put it, when a contractor bills for money, that billing isn't revenue and it isn't cash, it's just a cash-flow mechanism.[7] A WIP schedule tells you how a multi-month job is trending, and it's worth building once you're running longer contracts.[7] It will not tell you whether you can make Friday's payroll. For a shop that's fighting to stabilize, the bank balance and the job-cost sheet come first.

What to Do This Month

Start tracking costs by job, not in one pile. Every hour of labor, every material receipt, every trip to the site gets tagged to a specific project, so at the end you can see which jobs paid and which didn't.[5] A spreadsheet works to start.

Build a simple cash calendar next to it. For each active job, write down when you have to spend money and when you actually expect to collect, including any retainage being held back.[5][6] The gaps between those dates are your real risk.

Get your billing terms in writing and shorten the collection gap where you can. With 60% of contractors saying a customer's payment reputation affects whether they'll even bid, you're allowed to be choosy about who you work for.[4] Know your accounting method, cash or accrual, since the IRS sets rules on which methods a small business may use.[1] But treat that as bookkeeping hygiene, not the thing that saves you.

Bottom Line

Profit per job and timing of cash are the two levers a struggling shop can actually pull this month. The percentage-of-completion apparatus can wait until you're stable, because knowing a job was profitable does you no good if the money arrives after you've already gone under.

Sources

[1] Internal Revenue Service: Publication 334, Tax Guide for Small Business, on accounting methods and periods

[2] Legal Information Institute (Cornell Law): 26 U.S. Code § 460, special rules requiring the percentage-of-completion method for long-term contracts

[3] Legal Information Institute (Cornell Law): 26 CFR § 1.460-3, definition of long-term construction contracts and exemptions for home construction and short-duration jobs

[4] Built: national study finding 70% of contractors face payment delays, 8% bid inflation, and 35% project cancellations

[5] Foundation Software: Construction Accounting 101 guide on job costing, retainage, payment terms, and the CFMA 2023 profitability finding

[6] Construction Financial Management Association (CFMA): article on retainage classification under Topic 606

[7] AICPA & CIMA: WIP schedules article, including the construction business survival rate and how revenue is recognized versus billed

[8] Forvis Mazars: Method Update for Developers & Subcontractors, Long-Term Contracts (2025 inflation-adjusted gross receipts threshold for the section 460(e) small-contractor exemption)

[9] RKL LLP: Changes to Residential and Home Contracts in the One Big Beautiful Bill Act (section 460 exemption expansion and effective date)