Construction accounting basics: job costing and CIS

Published Thursday 26 February 2026

Table of contents

• What is construction accounting?
• Why is construction accounting different?
• Accounting methods in construction
• Job costing: tracking project profitability
• Set up your construction accounting foundations
• Comply with the Construction Industry Scheme (CIS)
• Update your accounts regularly
• Manage cash flow to avoid business failure
• Get your construction accounting organised
• FAQs on construction accounting

Key takeaways

• Implement job costing by tracking all direct costs (materials, labour, equipment, subcontractors) and indirect costs (office rent, insurance, admin) for each project separately to identify which jobs are profitable and which need attention.
• Update your accounting records at least weekly using cloud-based software that lets you record expenses, send invoices, and track cash flow from your mobile device while on site.
• Protect your cash flow by invoicing in stages as work progresses, requesting deposits for major expenses upfront, and stopping work immediately if clients miss payments to avoid business failure.
• Comply with the Construction Industry Scheme by registering with HMRC, verifying subcontractors before paying them, deducting the correct percentages (20% for registered, 30% for unregistered), and submitting monthly returns even when no payments were made.

What is construction accounting?

Construction accounting is a specialised form of financial management designed for the unique challenges of the construction industry. It tracks income, expenses and profitability across multiple projects, each with its own budget, timeline and workforce.

Unlike standard business accounting, construction accounting must handle:

• job costing: tracking all costs against specific projects
• progress billing: invoicing clients in stages as work is completed
• contractor payments: managing subcontractors and CIS deductions
• variable timelines: accounting for projects that span weeks, months or years

The goal is simple: know exactly how much each job costs, how much profit you're making, and whether you have enough cash to keep operating. Construction-specific accounting helps you price jobs accurately, manage cash flow and meet tax obligations.

Why is construction accounting different?

Construction accounting differs from standard accounting because the industry operates with constantly shifting variables. Unlike a retail shop or office-based business, construction work is project-based, mobile and reliant on a fluid workforce.

Here's what makes it unique:

• Project-based work: each job has its own budget, timeline and profit margin to track separately
• Fluid workforce: contractors and subcontractors come and go, often working on multiple projects simultaneously
• Decentralised operations: work happens across different sites, making centralised record-keeping difficult
• Variable payroll: your team size and composition can change weekly

These factors mean standard accounting practices don't quite fit. You need systems designed for tracking costs, income and profitability across multiple moving projects.

Accounting methods in construction

Construction businesses can choose from several accounting methods depending on their size, project types and legal requirements. The method you use affects when you recognise income and expenses, which impacts your tax bill and financial reports.

The main options are:

• Cash basis accounting: record income when you receive payment and expenses when you pay them. This method is simple to manage but doesn't show money you're owed or bills you haven't paid yet. Consider this method if you're a smaller contractor with straightforward projects.
• Accrual basis accounting: record income when you earn it (even if not yet paid) and expenses when you incur them. This method gives a more accurate picture of profitability but requires more detailed tracking. Use this method if you're a larger business or need to account for payment timing gaps.
• Percentage of completion method: recognise revenue proportionally as a long-term project progresses. For example, if a project is 50% complete, recognise 50% of the expected revenue. Use this method for projects spanning multiple accounting periods.
• Completed contract method: recognise all revenue and expenses only when a project is fully complete. This method is simpler but can create lumpy income and tax bills.

Most UK construction businesses use accrual accounting for compliance purposes. Talk to your accountant about which method suits your situation best.

Job costing: tracking project profitability

Job costing is the foundation of construction accounting. It means tracking every pound spent on each project so you know exactly which jobs make money and which don't.

Job costing shows you exactly which projects are profitable and which need attention. Job costing helps you catch problems early while you can still address them.

What to track for each job

Break your costs into two categories:

• Direct costs (expenses tied to a specific project): materials purchased for the job, labour hours worked on site, equipment hire or usage, and subcontractor payments
• Indirect costs (overhead shared across projects): office rent and utilities, insurance premiums, vehicle costs, and administrative salaries

Allocate a portion of indirect costs to each project based on its size, duration or labour hours.

How to track job costs

Follow these steps to keep your job costs accurate and up to date:

1. Set up each project separately in your accounting software with its own budget
2. Code every expense to the correct project as you incur it
3. Track labour hours by project, not just by employee
4. Review job profitability reports regularly to spot problems early

Good construction accounting software makes job costing straightforward by letting you assign costs to projects as you go.

Set up your construction accounting foundations

Setting up your construction accounting correctly from day one saves time, money and stress later. Before you take on any work, get your business foundations in place.

• Incorporate your business: choose a legal structure that offers protection. Options include limited company, partnership or sole trader. Talk to an accountant about which suits your situation best.
• Buy appropriate insurance: construction carries physical and legal risks. Get specialist cover including public liability and professional indemnity to protect yourself if things go wrong.
• Hire professional support:bookkeepers handle day-to-day transactions like expenses, bills and invoices. Accountants advise on business structure and tax savings. Both typically save you more than they cost.
• Keep certifications current: safety laws change regularly. Up-to-date qualifications protect your insurance cover and help you win more work.

Comply with the Construction Industry Scheme (CIS)

Construction businesses in the UK must comply with the Construction Industry Scheme (CIS). This government scheme requires contractors to deduct money from subcontractor payments and pass it to HMRC. It's one of the most important compliance requirements in UK construction.

Under CIS:

• Contractors must register with HMRC and verify subcontractors before paying them
• Deductions are typically 20% for registered subcontractors or 30% for unregistered ones
• Monthly returns must be submitted to HMRC, even if no payments were made

Getting CIS right helps you avoid penalties. Talk to your accountant or bookkeeper to make sure you're set up correctly from the start.

Update your accounts regularly

Update your accounts at least once a week. Construction moves fast, and if you fall behind on bookkeeping, things can quickly spiral out of control.

Build accounting into your daily workflow by using cloud-based accounting software. Modern tools let you access your accounts from a smartphone or tablet, even when you're on site.

From your mobile device, you can:

• send invoices as soon as a job is complete
• record expenses the moment you buy materials
• track cash flow in real time
• update employee hours before you forget

Staying on top of your accounts helps you charge accurately for all expenses. You'll also make the most of your tax allowances and stay prepared for audits.

For more information about the breakdown of costs during a construction project, check out the construction project start-up checklist.

Manage cash flow to avoid business failure

Cash flow problems are the number one killer of small construction businesses. The timing mismatch between paying for materials upfront and receiving payment later creates serious risk.

Here's a common scenario: a client hires you to build a warehouse. You pay for materials out of your own capital. Halfway through, the client goes bankrupt. You're unlikely to recover more than a fraction of your costs.

Protect yourself with these cash flow strategies:

• Invoice regularly: don't wait until project completion. Bill in stages as work progresses.
• Request deposits: get payment upfront for major materials or labour expenses before you commit.
• Match expenses to revenue: avoid spending more than you've been paid for.
• Stop work if payments stop: if a client misses a payment, pause the project until they're up to date.

Careful cash flow management helps protect your business from bad debts. Managing your cash flow carefully helps keep your business healthy.

For more information about the breakdown of costs during a construction project, check out the guide to hard vs soft costs in construction.

Get your construction accounting organised

Get your construction accounting organised from the start and keep it that way. The right systems help you track job profitability, manage cash flow and stay compliant with CIS requirements.

Professional-looking quotes and accurate job costing also help you win more work and build your reputation.

Modern cloud accounting software like Xero can simplify the entire process, from job costing to invoicing to contractor payments. Get one month free and see how much easier construction accounting can be.

FAQs on construction accounting

Here are answers to some of the most common questions.

What type of accounting is used in construction?

Most UK construction businesses use accrual basis accounting, which records income when earned and expenses when incurred. For long-term projects, the percentage of completion method recognises revenue as work progresses. Smaller contractors may use cash basis accounting for simplicity.

Is construction accounting difficult?

Yes, it's more complex than standard accounting because you're tracking costs across multiple projects, managing subcontractor payments, handling CIS deductions and dealing with progress billing. However, modern accounting software automates much of this, making it manageable even without accounting expertise.

What does an accountant do in construction?

A construction accountant helps with job costing setup, CIS compliance, cash flow management and tax planning. They can also handle progress billing, retainage tracking and financial forecasting for projects. Many construction businesses find that hiring an accountant saves more than it costs.

Should I use separate bank accounts for each construction project?

Not necessarily. Most small contractors track project finances within their accounting software rather than opening separate bank accounts. However, some larger contractors do use separate accounts for major projects to simplify cash flow tracking. Xero's tracking categories let you monitor project finances without multiple accounts.

How often should I update my construction accounting records?

At least weekly, ideally daily for expenses and time tracking. The more frequently you update, the better visibility you have into job profitability and cash flow. Mobile accounting apps make it easy to record expenses and hours from site.