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Construction accounting connects job costs, earned revenue and billings so a contractor can see how each project is performing. Under the cost-to-cost percentage-of-completion method, progress is generally measured by costs incurred against estimated total costs—not by the amount invoiced. A work-in-progress (WIP) schedule brings those figures together, while tax rules and financial-reporting rules can require different analyses.
What is construction accounting supposed to show?
Construction accounting should show, for each contract, what the company has spent, how much work it has performed, how much revenue it has earned, and how that compares with its billings. Those measures answer different questions. Job costing tracks project resources; revenue recognition measures performance under the applicable accounting method; billing tracks amounts requested from or invoiced to the customer.
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Keeping the measures distinct matters because they rarely move in lockstep. A contractor may invoice ahead of the work completed, or may perform and recognize work before submitting a billing. Neither situation by itself proves that a job is profitable or unprofitable. The underlying cost forecast, contract terms and progress calculation determine what the figures mean.
In the United States, contractors also need to distinguish financial reporting from income-tax reporting. Financial statements follow the applicable accounting framework, including the revenue model in ASC 606. Federal tax treatment is governed separately; IRC §460 generally requires the percentage-of-completion method for long-term contracts, subject to exceptions and other rules. The IRS Construction Industry Audit Technique Guide and CBIZ’s discussion of financial and tax methods describe why a method conclusion depends on the contract and taxpayer, not just a preference for smoothing income.
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How does job costing work in construction?
Job costing assigns project-specific and allocated costs to a unique contract or job code. Comparing actual costs with the job’s budget and remaining-cost forecast lets managers spot overruns, assess expected margin and act while work is still underway.
Set up a job master for every contract and use consistent cost codes across estimates, purchasing, payroll and accounting. At minimum, capture these categories:
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- Direct labor: capture labor by job, including associated benefits and payroll taxes where the system allocates them as job costs.
- Equipment: track rentals, fuel, maintenance and depreciation on a documented basis.
- Subcontractors: track commitments as well as invoices, so the forecast reflects costs the company has incurred or agreed to pay even if an invoice has not arrived.
- Indirect overhead: allocate shared costs using a consistent, documented basis rather than leaving them invisible or assigning them arbitrarily.
Record costs as they are incurred and reconcile vendor invoices and payroll to the job ledger. For active jobs, compare actual-to-estimate at least weekly. That check is useful only if the estimate is current: a project manager’s forecast should incorporate scope changes, productivity, remaining work and known commitments rather than simply extend the original budget.
Retain support for cost coding, commitments, approved change orders and estimate revisions. A reliable job-cost record gives the WIP schedule a defensible cost-to-date figure and helps explain why the projected margin changed. If an invoice or payroll entry is uncoded or posted late, the schedule can show a misleading completion percentage even when the field work has not changed.
How is construction revenue calculated using percentage of completion?
With a cost-to-cost measure, percentage complete is allocated costs incurred to date divided by estimated total allocated costs. Cumulative earned revenue is then based on that completion factor and the estimated contract price, with amounts recognized in prior periods taken into account when calculating the current period.
The basic calculation is:
Percentage complete = allocated costs incurred to date ÷ estimated total allocated costs
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Cumulative earned revenue = percentage complete × estimated contract price
For the current reporting period, subtract revenue recognized in earlier periods from cumulative earned revenue. The exact calculation and its inputs must follow the applicable reporting method; the formulas are not a substitute for analyzing contract terms or the relevant accounting and tax rules.
The IRS guide gives an illustrative tax-method example: a contract with an estimated price of $3,000,000, estimated total costs of $2,000,000, and costs incurred of $1,000,000 is 50% complete. Multiplying 50% by the estimated contract price produces $1,500,000 of cumulative percentage-of-completion income before adjustment for gross receipts reported in earlier years. This is an example from IRS guidance, not a typical margin or a benchmark for contractors.
For financial statements, ASC 606 uses a five-step framework: identify the contract; identify its performance obligations; determine the transaction price; allocate that price to the obligations; and recognize revenue when or as each obligation is satisfied. Many construction contracts result in recognition over time, using cost-to-cost or another defensible measure of progress. The analysis can also require attention to contract modifications, variable consideration, contract assets and liabilities, and disclosures. The CBIZ overview discusses these financial-reporting considerations.
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What should a construction WIP report include?
A WIP report is a reporting-date schedule, usually with one row per active contract, that connects project forecasts, costs, earned revenue and billings. It helps management and financial-statement users see whether the current billing position is ahead of or behind the revenue earned to date.
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For each job, include the following information where relevant:
- Original contract price and revised contract price.
- Estimated total cost and estimated cost to complete.
- Costs incurred to date and the calculated percentage complete.
- Earned revenue to date and revenue recognized in the current period.
- Estimated gross profit and gross profit recognized to date.
- Billings or requisitions to date.
- Accounts receivable and retainage, where relevant.
- The net over-billing or under-billing balance.
The AICPA & CIMA guide to WIP schedules describes the schedule as a way to calculate how much revenue has been earned at a particular date. Its example says a contractor that has spent $250,000 on a project with a $1 million budget is 25% complete under the example method; 25% of revenue and gross profit are recorded at that point. A requisition is a cash-flow mechanism, not a measure of earned revenue.
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Why don’t billings equal revenue?
Billings follow the contract’s billing cadence and requisition process, while earned revenue follows the applicable progress measure. Because the timing can differ, the balance sheet may show an over-billing or under-billing even when revenue has been calculated correctly.
Under percentage-of-completion accounting, costs and estimated earnings in excess of billings are presented as an asset. Billings in excess of costs and estimated earnings are presented as a liability. The net position is the difference between earned contract value and billings, not a standalone verdict about the job’s profitability.
For example, a billing schedule may request cash before the same amount of work has been earned. That can create a billing-in-excess position. In another period, work and earned revenue may run ahead of requisitions, producing costs and estimated earnings in excess of billings. The balance reflects timing between performance and billing; it does not mean the customer has paid, nor does it replace the receivables ledger.
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Investigate unusually large balances rather than labeling them automatically as profit or loss. Possible causes include front-loaded billing, costs captured late, unapproved change orders, incorrect percent-complete inputs or a forecast that has not been updated. The IRS construction audit guide chapter describes the presentation of these balances under percentage-of-completion reporting.
When can a contractor use completed-contract accounting?
Completed-contract accounting defers revenue and profit until a contract is completed or substantially completed under the applicable method. It is not a general alternative that every contractor can choose: for U.S. tax, IRC §460 generally requires percentage of completion for long-term contracts unless an exception or permitted method applies.
| Consideration | Percentage of completion | Completed contract |
|---|---|---|
| Revenue timing | Recognizes revenue and profit as measurable work progresses. | Defers revenue and profit until completion or substantial completion. |
| Estimates | Depends on supportable contract-price, total-cost and progress estimates. | May be available in limited cases, including where dependable estimates cannot be made or the financial difference is immaterial. |
| U.S. tax treatment | Generally required for long-term contracts under IRC §460, subject to exceptions. | Available only when the contract and taxpayer qualify for an exception or permitted method. |
| Management visibility | Shows production and forecast margin during the job. | Can show little or no revenue in earlier periods and a large result at completion. |
| Progress reporting | Often supports periodic reporting to lenders and sureties. | May be unsuitable when users need progress reporting unless the financial effect is not materially different. |
A method conclusion should document contract classification, estimate reliability, applicable elections and why the method reflects the relevant reporting framework. Financial-reporting treatment and tax treatment are related but are not automatically identical; a contractor should not assume that a choice or result for one purpose controls the other. The IRS guide and CBIZ’s overview provide context, but a contractor’s facts determine the method analysis.
How should a contractor close and review WIP each period?
A disciplined close ties field forecasts and accounting records to the same reporting date. Use this sequence for each monthly or other reporting close:
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- Set the cutoff. Lock the reporting date and collect each project manager’s percent-complete and cost-to-complete updates for that date.
- Reconcile costs. Tie job-cost detail to the general ledger. Investigate uncoded costs, late vendor invoices, payroll that has not been assigned and commitments absent from the forecast.
- Update contract assumptions. Incorporate approved change orders, claims, incentives and variable consideration according to the applicable accounting treatment. Keep evidence of the status and approval supporting each change.
- Recalculate progress and revenue. For every active job, recalculate percentage complete and current-period revenue using the chosen, supportable progress measure. Compare the result with prior periods and explain significant changes.
- Compare earned revenue with billings. Calculate the over- or under-billing position and post the appropriate asset or liability presentation.
- Assess expected losses. Identify a forecast total-contract loss promptly and record it under the applicable reporting rules. The IRS guide notes that for financial-reporting methods, losses should be provided in the period they become evident; tax timing can differ by method.
- Tie WIP to the statements. Reconcile WIP totals to revenue, cost of sales, receivables, retainage and contract liabilities, as applicable.
- Review exceptions with operations. Discuss unusual margins, aged receivables, retainage and large forecast revisions with the project team, and document the reasons for changes.
- Keep the support. Preserve the WIP schedule, cost-to-complete estimates, approvals and other support for lenders, sureties, auditors and tax reporting.
These controls matter because the cost-to-cost calculation is only as useful as its inputs. A stale estimate can make a project appear more complete than it is or can hide an emerging loss. A late cost can change the measured progress and gross profit even when the contract price has not changed. Regular review makes these movements visible while there is still time to address operational causes.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How should estimates and changes be handled?
Reforecast estimated total cost and contract price when the scope, productivity, change orders or expected losses change. Percentage of completion is an estimate-driven calculation, so a revision to the expected cost to finish can change both the completion percentage and the revenue profile even if costs incurred stay the same.
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Keep original contract terms distinguishable from revised assumptions, and preserve the support and approval trail for changes. A claimed or proposed change is not automatically the same as an approved contract-price revision; evaluate modifications, claims and variable consideration under the applicable financial-reporting and tax rules. The WIP should show the current estimate while records preserve how and why it changed.
Review estimate revisions with both accounting and operations. Ask whether the cost to complete reflects remaining quantities, productivity and subcontractor commitments; whether contract price includes only supportable amounts; and whether a newly expected loss has been recognized in the period required by the applicable rules. These checks are more useful than relying on one headline margin figure.
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What does construction accounting mean for a contractor’s business?
Job costing and WIP are management tools as well as reporting schedules. They can show which jobs are consuming more labor or materials than estimated, whether committed subcontract costs have been captured and how margin forecasts are changing. They also give lenders, sureties and other financial-statement users a clearer view of work underway than billing totals alone.
The AICPA & CIMA source reports that 35.9% of construction companies founded in March 2011 remained in operation by March 2022, citing U.S. Bureau of Labor Statistics data. That is a historical survival statistic for a specific founding cohort and period, not a current industry survival rate. It illustrates the business pressures in the sector, but it should not be treated as evidence that any particular accounting method causes a contractor to succeed or fail.
Contractors seeking a formal reference can consult the AICPA’s Audit and Accounting Guide: Construction Contractors; the cited CBIZ article identifies it as a source for contractor financial reporting. Verify the applicable edition and its current availability independently. Accounting software may help organize job codes, costs, WIP schedules and supporting documents, but a system does not decide whether a contract qualifies for a particular accounting or tax method.
Frequently Asked Questions
Can financial statements and a tax return show different construction revenue?
Yes. Financial reporting and federal tax accounting use separate rules, and a method available or required for one purpose may not produce the same timing for the other. Contractors should retain a reconciliation and method support rather than assuming the WIP schedule alone determines taxable income.
Does retainage count as earned revenue before the customer releases it?
Retainage is a billing or collection feature that should be tracked where relevant, separately from the calculation of earned revenue. Whether and when an amount is recognized depends on the contract and applicable accounting analysis, not solely on when cash is released.
What records support a contractor’s WIP estimates?
Useful support includes the job-cost ledger, payroll and vendor detail, subcontract commitments, project-manager cost-to-complete forecasts, approved change-order documentation and a record of estimate revisions. Keeping the evidence together makes it easier to explain reported progress and margin changes.
Can accounting software decide whether percentage of completion applies?
No. Software can organize job costs, calculations and documentation, but method eligibility depends on the contract, taxpayer and reporting framework. Treat the system’s output as an accounting input, not a substitute for a documented technical conclusion.
