Accounting for Construction Companies: Job Costing and WIP

Construction accounting operates by different rules than most other industries. While a retail business records a sale when a customer pays and revenue is immediately clear, a construction company signs a $5 million contract, spends 18 months completing it, and must account for revenue, costs, profits, and cash flow across dozens of pay applications, change orders, and retainage withholdings — none of which follow a simple timing pattern.

The two foundational concepts that every construction accountant must master are job costing (the process of tracking every dollar of cost by project) and work-in-progress (WIP) accounting (the mechanism for recognising revenue and profit as projects progress). These concepts interact with cash flow in ways that can make a profitable contractor appear to be losing money — or a troubled company appear profitable — if the accounting is not done correctly.

Key Takeaways

• Job costing tracks labour, materials, subcontractors, equipment, and overhead by project — it is the foundation of all construction financial management
• Percentage of completion method (ASC 606 input or output methods) is required for most long-term construction contracts
• Overbillings (billing in excess of costs and earnings) are liabilities; underbillings (costs and earnings in excess of billings) are assets
• The WIP schedule is the single most important financial report for a contractor — banks, sureties, and owners all rely on it
• Retainage (5–10% of contract value withheld) creates a receivable that is often collected 60–180 days after project completion
• Overhead allocation to jobs is essential for accurate job-level profitability — unallocated overhead makes all jobs appear more profitable than they are
• Change orders must be documented before costs are incurred — unapproved change orders create disputed revenue recognition
• Job cost variance analysis (budget vs. actual by cost category) should be reviewed weekly on active projects

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The Construction Chart of Accounts

Construction accounting requires a chart of accounts designed around projects, not just departments. The standard structure separates contract revenue, direct job costs, indirect costs (overhead), and general and administrative expenses.

Revenue accounts:

4000 - Contract Revenue - Original Contract
4010 - Contract Revenue - Approved Change Orders
4020 - Contract Revenue - Claims (when recovery is probable)
4100 - Subcontract Revenue (on GC contracts)

Direct job cost accounts (costs that can be directly attributed to a specific project):

5000 - Direct Labour
5010 - Labour Burden (payroll taxes, benefits, workers comp)
5100 - Materials and Supplies
5200 - Subcontractors
5300 - Equipment - Owned (depreciation, maintenance)
5310 - Equipment - Rented
5400 - Architectural and Engineering Fees
5500 - Permits and Inspections
5600 - Temporary Facilities (job trailers, fencing, portable toilets)
5700 - Small Tools
5800 - Insurance - Builder's Risk (job-specific)
5900 - Bonds (project-specific performance and payment bonds)

Indirect costs / overhead (allocated to jobs):

6000 - Shop and Yard Labour
6100 - Indirect Materials
6200 - Vehicle Costs - Fleet
6300 - Equipment - Common Fleet
6400 - Safety and Training
6500 - Project Management (not directly chargeable)
6600 - Estimating Department

General and Administrative (NOT allocated to jobs):

7000 - Executive Salaries
7100 - Office Salaries
7200 - Office Rent and Utilities
7300 - Accounting and Legal
7400 - Business Development
7500 - Corporate Insurance

The separation between indirect costs and G&A is critical: indirect costs are part of the cost of doing construction work and should be allocated to projects for accurate profitability assessment. G&A costs are not allocable to specific projects and are expensed as period costs.

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Job Costing: The Foundation of Construction Financial Management

Job costing is the process of accumulating all costs incurred on a specific project — labour hours and rates, material purchases, subcontractor invoices, equipment charges, and allocated overhead — and comparing them to the estimated costs and the revenue earned on that project.

Setting up a job cost system:

Every project gets a job number (sometimes called a cost centre or project code). Every cost transaction — purchase order, timesheet entry, subcontractor invoice, equipment log — must reference a job number and a cost code.

Cost codes provide granularity within a project. A commercial building project might have cost codes for:

• 01-000: General requirements
• 03-000: Concrete
• 04-000: Masonry
• 05-000: Structural steel
• 06-000: Wood framing
• 07-000: Thermal and moisture protection
• 08-000: Doors and windows
• 09-000: Finishes
• 15-000: Mechanical
• 16-000: Electrical

These codes (based on the Construction Specifications Institute MasterFormat system) allow you to compare actual costs to estimated costs at the cost category level — essential for identifying where a project is running over budget.

Labour tracking:

Labour is typically the most variable and most difficult-to-track cost in construction. Each worker must report their hours by project and cost code daily. Supervisors should verify hours weekly. The labour rate charged to the job should include not just the wage but the full burden rate — payroll taxes (FICA, FUTA, SUTA), workers' compensation insurance, liability insurance, health benefits, and retirement contributions.

A $25/hour carpenter might have a total burden rate of $38–$42/hour when all employment costs are included. The fully burdened rate is what goes into your job cost, not just the wage.

Equipment charging:

For owned equipment, establish an internal charge rate for each piece of equipment based on depreciation, maintenance, operating costs, and expected utilisation. Charge the job an hourly, daily, or weekly rate when equipment is deployed on the project. This allocates equipment cost to the project that benefits from it and maintains equipment profitability tracking at the asset level.

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Percentage of Completion Method

The percentage of completion (POC) method is the required revenue recognition approach for most long-term construction contracts under ASC 606. It recognises revenue and gross profit proportional to the progress made on the contract during each accounting period.

Measuring progress:

ASC 606 allows both input measures (costs incurred) and output measures (surveys of completion, milestones, units completed) to measure progress toward completion. Most construction companies use the cost-to-cost input method because it is objective and auditable.

Cost-to-cost percentage of completion formula:

Percent Complete = Costs Incurred to Date ÷ Total Estimated Contract Costs
Revenue Earned to Date = Percent Complete × Total Contract Revenue
Revenue Earned This Period = Revenue Earned to Date − Revenue Earned in Prior Periods
Gross Profit This Period = Revenue Earned This Period − Costs Incurred This Period

Worked example:

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Work-in-Progress Schedule: The Contractor's Most Important Report

The WIP schedule compiles the status of all active projects into a single report that shows revenue earned, costs incurred, billings, and the resulting overbilling or underbilling position for each project and in total.

WIP schedule columns:

Reading the WIP schedule:

Projects with significant underbillings may have cash flow problems — you have earned revenue but not collected it. Investigate whether billings are delayed (a billing process problem) or whether the project is ahead of schedule on earnings (generally positive).

Projects with significant overbillings represent amounts received from the owner in excess of earned revenue. This is fine if it reflects front-loaded billing schedules, but if overbillings are growing relative to project progress, the project may be in trouble — you may have collected deposits on work you will struggle to complete profitably.

The completed contract method:

An alternative to percentage of completion, the completed contract method recognises all revenue and cost at project completion. It is simpler but provides no profitability visibility during the project and can distort period financial results significantly. Under ASC 606, completed contract is generally not permitted except for short-duration contracts (typically under 1 year) that are not significantly over a reporting period boundary.

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Overbillings and Underbillings: Balance Sheet Treatment

Overbillings and underbillings appear on the balance sheet, not the income statement, and their presentation has changed under ASC 606.

Under ASC 606 terminology:

• Overbilling = "Contract liability — billings in excess of costs and estimated earnings" — a current liability
• Underbilling = "Contract asset — costs and estimated earnings in excess of billings" — a current asset (but conditional on continued performance)

Why the distinction matters:

A contractor's balance sheet can look very different depending on their billing practices. A contractor who consistently front-loads billing (bills more than earned early in projects) will show large contract liabilities — these are not equity or profit, they are obligations to deliver future work. A contractor who is slow to bill (perhaps because they are waiting for owner approvals) will show large contract assets — these represent earned revenue not yet billed.

Bonding agents and lenders pay close attention to the ratio of contract assets to contract liabilities and to the trend over time. Rapidly growing underbillings (contract assets) can signal cash flow strain — the contractor has done the work but cannot collect yet. Rapidly growing overbillings (contract liabilities) can signal future performance risk.

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Change Order Management and Accounting

Change orders (modifications to the original contract scope) are a defining feature of construction contracting. A large commercial project may have hundreds of change orders over its life. Each must be tracked, priced, negotiated, and accounted for correctly.

Change order categories and accounting treatment:

Approved change orders: Add to the contract amount and estimated cost immediately. Update the WIP schedule. Recognise revenue proportional to work completed.

Pending change orders — probable and estimable: Under ASC 606, include in the transaction price if it is probable the change will be approved and the amount can be reliably estimated. Constrain to the amount where a significant revenue reversal is not probable.

Disputed change orders / claims: Only include in revenue if: you have a legal basis for entitlement, the additional amount can be measured reliably, and recovery is probable. The bar for claim recognition is high — most contractors should not recognise unapproved claim revenue.

Accounting entry for approved change order:

When a $50,000 change order is approved on a project:

• Update the contract amount and estimated cost in your project system
• No journal entry is required immediately — the revenue will be recognised through the percentage of completion calculation in the next period

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Retainage Accounting

Retainage (or retention) is the percentage of each progress billing that the owner withholds until project completion or a defined milestone. Typically 5–10% of billings, retainage is a significant component of a contractor's receivables and a common source of cash flow stress.

Recording retainage:

When you submit a $100,000 progress billing with 10% retainage:

• Debit Accounts Receivable — Retention: $10,000
• Debit Accounts Receivable — Progress Billing: $90,000
• Credit Contract Billings: $100,000

The $10,000 retainage receivable sits on your balance sheet until the owner releases it. On large projects, retainage receivables can represent 10–15% of total contract value — a substantial sum that is not available for operations.

Retainage on subcontractors:

Contractors typically withhold the same retainage percentage from subcontractors as owners withhold from them. This creates a retainage payable that offsets the retainage receivable. When the owner releases retainage, the contractor releases it to subcontractors (usually after a brief period to verify no liens or defect claims).

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Frequently Asked Questions

What is the difference between job cost accounting and project accounting?

Job cost accounting and project accounting are often used interchangeably in construction. Job costing emphasises the accumulation of costs at the individual project level for profitability tracking. Project accounting is broader, encompassing job costing plus billing management, change order tracking, subcontract management, schedule variance analysis, and WIP reporting. In practice, robust construction accounting requires both — cost accumulation at the job level and financial reporting at the project and company level.

How often should the WIP schedule be updated?

The WIP schedule should be updated at minimum monthly, coinciding with your financial close. For active projects with frequent billing cycles, update it weekly. The WIP schedule is only as accurate as your cost-to-complete estimates — these estimates should be updated by project managers each month, not just copied from the original budget. Stale cost-to-complete estimates are the most common source of WIP schedule inaccuracy.

How do I account for a project that will lose money?

When you determine that a contract will result in a loss (revised estimated cost exceeds contract revenue), recognise the entire expected loss immediately in the current period under ASC 606. This is a "loss contract" provision. Calculate: Expected total loss = Revised contract revenue − Revised total estimated cost. Post the full expected loss to the income statement as a job cost, not as a revenue reduction. Do not wait for the project to be completed — recognise the anticipated loss as soon as it becomes probable.

What overhead costs should be allocated to jobs?

Allocate indirect costs that relate to production activity: equipment fleet costs, shop and yard labour, indirect materials, project management salaries (for time not directly chargeable), safety and training, and estimating costs. Do not allocate G&A costs (executive pay, office overhead, business development) to jobs. Common allocation bases: direct labour hours, direct labour dollars, or total direct cost. Use the same base consistently across all jobs and document your methodology.

How should I handle equipment purchased for a specific project?

If equipment is purchased specifically for one project and will be sold or has no value after project completion, the cost is a direct job cost. If equipment will be used across multiple projects, capitalise it as a fixed asset, charge each project the internal equipment rate, and depreciate the equipment over its useful life. The depreciation flows into equipment overhead costs allocated to projects. Do not expense multi-project equipment purchases directly to one job.

What financial information do bonding agents and lenders require from contractors?

Surety bonding agents and lenders typically require: CPA-prepared (reviewed or audited) annual financial statements, a current WIP schedule with completed contract history, a schedule of all open subcontracts and supplier liabilities, personal financial statements of key principals, equipment list with fair market values, and work-on-hand narrative (pipeline). The WIP schedule quality is often the most scrutinised document — it reveals how well management understands their project portfolios and whether cost-to-complete estimates are realistic.

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Next Steps

Construction accounting requires specialised expertise that goes beyond general bookkeeping. Job costing systems, WIP schedules, percentage of completion calculations, retainage tracking, and certified payroll compliance for government contracts all require construction-specific knowledge that generalist accountants often lack.

ECOSIRE's accounting team provides construction industry specialists who understand the full financial lifecycle of a construction project — from the initial budget and contract review through final billing, retainage collection, and closeout. We support contractors from $1M to $100M+ in annual revenue across general contracting, specialty trades, and construction management.

Explore ECOSIRE Accounting Services to learn how our construction accounting specialists can improve your financial visibility, WIP accuracy, and cash flow management.