Construction accounting guide: Track costs and boost profits

Published Friday 10 October 2025

Table of contents

• What is construction accounting?
• Why is construction accounting different?
• Key construction accounting concepts
• Construction accounting methods
• Start at the beginning
• Make accounting part of your workflow
• Beware of the cash flow trap
• Build for the future with Xero
• FAQs on construction accounting

Key takeaways

• Implement project-based accounting with job costing to track all costs (labour, materials, and overheads) for each construction project separately, allowing you to identify which jobs are profitable and which are not.

• Update your accounting records weekly with all material costs, labour expenses, and cash flows to maintain accurate project tracking and avoid missing tax-deductible expenses that could impact your bottom line.

• Manage cash flow carefully by matching large expenses with revenues, invoicing regularly, and requiring upfront payments for major material purchases to avoid the common trap of paying suppliers before receiving client payments.

• Choose the appropriate revenue recognition method—either percentage of completion (PCM) for ongoing revenue recognition or completed contract method (CCM) for recognizing all revenue when projects finish—based on your business needs and project types.

What is construction accounting?

Construction accounting is project accounting designed for the construction industry. Unlike regular accounting, which looks at your whole business over a set time, construction accounting focuses on each job or project. Projects can last for months or years.

It involves tracking costs for each project – a practice called job costing. This helps you see if a job is profitable. You also use special methods to recognize revenue, since you might get paid in stages over a long period.

Why is construction accounting different?

Construction accounting is a specialized approach for the financial challenges of construction businesses. Unlike other businesses, construction companies work on projects that need different accounting methods.

Construction businesses differ from conventional companies because they have:

• manage multiple projects at the same time, often working on several jobs at once
• work with a complex workforce, as site managers rarely employ all workers directly – most are independent contractors
• hire subcontractors for specialized work
• adjust payroll weekly based on project needs
• use a temporary workforce as projects require different skills

Key construction accounting concepts

To manage your construction accounting, you need to understand a few key ideas:

• track all costs for each job, including labour, materials and overheads, to see the profit or loss for each project
• organize your books around individual projects, treating each as its own business with a separate budget and financial reports
• manage long-term contracts that span multiple accounting periods, which affects how and when you report income
• account for change orders by tracking extra costs and revenue when the project scope changes

Construction accounting methods

Because construction projects take a long time to complete, there are specific methods for recognizing revenue. The two most common are:

• Percentage of completion method (PCM): recognizes revenue and expenses as you complete parts of the project
• Completed contract method (CCM): recognizes all revenue and profit only when the project is finished

Choose the method that best fits your business and projects. If you need help, speak to a professional advisor.

Start at the beginning

Set up your construction business properly from the start to save time, money and avoid legal issues. Put these basics in place before your first project:

• choose a legal structure, such as a limited liability company, partnership or sole proprietorship, and consider the tax benefits for each
• get specialized construction insurance to protect against physical and legal risks
• hire an accountant or bookkeeper to manage your accounts and help you save on tax
• keep your certifications current through training courses – your insurance and work depend on it

Make accounting part of your workflow

Update your accounts regularly in construction because projects move fast and costs change quickly. Staying up to date helps you charge correctly, claim tax deductions, and keep your cash flow healthy.

Update your accounting system weekly with:

• record all material costs, labour expenses and project-related purchases
• track money coming in from clients and going out to suppliers
• update payroll data as workers join or leave projects
• bill clients promptly to maintain steady cash flow

Cloud-based Xero accounting software lets you update records from job sites using your smartphone or tablet. This means you can track expenses and send invoices even when you're not in the office.

By doing this, you avoid missing expenses, claim all your business tax allowances, and stay prepared for any review.

Beware of the cash flow trap

Manage your cash flow carefully in construction because you often pay for materials upfront and get paid after the project. Careful planning helps you stay financially secure.

Here's why cash flow problems happen:

The cash flow trap: You pay $50,000 for warehouse materials upfront. If your client cannot pay, you may only recover 10 – 20% of your costs, leaving you out of pocket.

The solution: Match your big expenses with big revenues. Invoice regularly and ask for upfront payment for major material purchases. Only continue work when payments are up to date.

This is why it's important to keep your cash flow balanced. Many small construction firms fail because of bad debts. Careful cash flow management—and utilizing available support like Futurpreneur Canada's program offering financing up to $75,000 for young entrepreneurs—prevents you from becoming one of them.

Build for the future with Xero

Proper construction accounting foundations protect your business just like strong building foundations protect structures. When you organize your accounting systems properly and maintain them consistently, you'll:

• avoid cash flow crises by tracking project costs and client payments accurately
• maximize profitability by identifying which projects make money and which do not
• comply with tax regulations and avoid costly penalties
• make confident decisions with real-time financial data from all your projects

Set up your construction accounting now with Xero to save time, money and stress as your business grows.

Try Xero for free today to get started.

FAQs on construction accounting

Here are answers to some common questions about construction accounting.

What type of accounting is used in construction?

Construction businesses typically use project-based accounting with a strong focus on job costing. They may use either the percentage of completion method (PCM) or the completed contract method (CCM) for recognizing revenue on long-term projects.

Is construction accounting difficult?

It can be more complex than regular accounting because of its project-based nature, long-term contracts, and fluctuating costs. However, using the right software and having a clear process makes it much easier to manage.

How do you record construction accounting?

Record transactions by assigning costs like labour and materials to each job. Set up a detailed chart of accounts, track direct and indirect costs for each project, and reconcile your books regularly.

Do I need special software for construction accounting?

Use accounting software with job costing, project tracking and progress invoicing features to manage your construction finances accurately and efficiently.

What's the difference between job costing and project accounting?

Project accounting manages a project's finances from start to finish. Job costing tracks the costs for each job to see if it is profitable.