How to Do Bookkeeping for a Construction Company

I had a general contractor in Katy walk into my office last spring after closing out a $1.2 million commercial build. The crew finished on time. The client paid in full. On paper, it looked like a great year.

Then we sat down with his books. Materials from one job were charged to another. Retainage receivables weren’t tracked. Equipment depreciation was never recorded. The profit that looked obvious in the field had disappeared somewhere between the job site and his QuickBooks file.

Construction bookkeeping doesn’t follow the same rules as every other business. Revenue recognition works differently. Cost structures are different. Compliance requirements are different. Get it wrong and you’ll pay the price at tax time and when you’re applying for your next bond.

Why Construction Books Don’t Work Like Other Businesses

Most businesses sell something, collect payment, and record revenue. Construction doesn’t work that way.

A single project can run months or years. Payments come in stages. Costs hit the books long before you recognize revenue. Materials bought for one job get sent to another. Subs send invoices whenever they send them.

A $10,000-per-month lawn care company and a $3 million GC have almost nothing in common when it comes to bookkeeping. Here’s what makes construction different from every other industry:

Long project timelines that cross multiple accounting periods
Progress billing tied to milestones, not calendar dates
Retainage withheld until project completion
Job costing that tracks profitability per project, not per month
Heavy equipment with complex depreciation schedules
Multi-trade payroll with varying labor classifications
Bonding and insurance requirements that demand clean financials

Standard bookkeeping wasn’t built to handle any of these.

Job Costing: Get This Right or Nothing Else Matters

Job costing means tracking every dollar of revenue and expenses by individual project. I’ve seen this done correctly maybe 40% of the time.

Without it, you know whether the company made money overall. With it, you know which projects made money, which ones lost money, and why.

How It Works in Practice

Every transaction gets assigned to a specific job and cost code. Here’s a typical structure:

Direct Costs:

Labor (by trade or crew)
Materials
Subcontractor payments
Equipment rental
Permits and fees

Indirect Costs (allocated to jobs):

Supervision
Job-site insurance
Temporary facilities
Small tools and supplies

General Overhead (not allocated):

Office rent
Administrative salaries
Accounting and legal fees
Marketing

I work with a remodeling company in the Heights that runs five kitchen renovations at once. If materials from Project A get charged to Project B, both cost reports are useless. Every receipt, every timecard, every sub invoice has to code to the right job before it touches the books.

Cost-to-Complete Estimates

Job costing also lets you do cost-to-complete analysis at any point during a project. Compare actual costs against budget, estimate what’s left, and catch overruns at 40% completion instead of at the very end.

I’ve seen this save Houston contractors six figures on a single project.

Progress Billing and Revenue Recognition

Construction companies don’t typically invoice for the full contract upfront. They bill as work progresses. That creates a revenue recognition headache most industries never deal with.

Percentage-of-Completion Method

Under ASC 606, construction contracts recognize revenue based on the proportion of work completed, usually measured by costs incurred versus total estimated costs.

Example:

Total contract value: $500,000
Total estimated costs: $375,000
Costs incurred to date: $187,500
Percentage complete: 50%
Revenue recognized: $250,000

This gives you an accurate picture during long projects, not just when you send an invoice or deposit a check.

Overbillings and Underbillings

Progress billing creates overbillings and underbillings on your balance sheet.

Overbilling means you’ve invoiced more than you’ve actually earned based on completion percentage. That’s a liability.

Underbilling means you’ve earned more than you’ve invoiced. That’s an asset.

Both are normal in construction. But tracking them accurately matters, especially for bonding. Surety companies scrutinize your overbilling/underbilling schedule closely. Consistent overbilling can signal cash flow problems. Persistent underbilling means you’re not billing aggressively enough.

Retainage: The Cash You Can’t Touch Yet

Retainage is the 5% to 10% of each progress payment that the project owner withholds until you’re substantially complete. It protects them against defective work or punch list items.

For a Houston contractor on a $2 million project with 10% retainage, that’s $200,000 sitting in receivables that won’t convert to cash for months after the work is done.

You need separate AR line items for each project: standard receivables (amounts billed and due) and retainage receivables (amounts billed but withheld). You’re likely withholding retainage from your subs the same way.

Lump retainage in with regular receivables and your balance sheet is wrong and your cash flow projections are fiction.

WIP Reporting: The Financial Pulse of Your Company

The Work-in-Progress schedule shows the status of every open project in one report. Contract value, costs to date, estimated costs to complete, revenue earned, amounts billed, and the resulting over/underbilling.

What Goes on the WIP

For each active project:

Field	Description
Contract Value	Total contract amount including change orders
Costs to Date	All costs incurred
Estimated Total Cost	Original estimate plus approved changes
Percent Complete	Costs to date / estimated total cost
Earned Revenue	Contract value x percent complete
Billings to Date	Total invoiced to the owner
Over/(Under) Billing	Billings minus earned revenue
Projected Profit	Contract value minus estimated total cost

Banks, bonding companies, and CPAs all want to see your WIP. A Houston contractor going after a performance bond on a $5 million project needs a clean, current WIP report. If the numbers don’t reconcile or the estimates look shaky, the bond application gets held up.

Your WIP is only as good as your job costing. If costs are miscoded or estimates aren’t current, the WIP becomes fiction. Most contractors I work with update monthly. Those managing bigger or more complex projects update every two weeks.

Equipment and Depreciation

Construction companies carry a lot of fixed assets. Excavators, dump trucks, cranes, concrete mixers, generators. Each one depreciates on an IRS schedule.

MACRS Depreciation

Most construction equipment falls under MACRS. Here are the common recovery periods:

5-year: Vehicles, light trucks, computers, specialized tools
7-year: Office furniture, most heavy equipment
15-year: Land improvements, certain infrastructure
39-year: Commercial buildings

Section 179 and Bonus Depreciation

A lot of Houston contractors use Section 179 to write off equipment the year they buy it instead of spreading the deduction over years. The 2025 limit is $1,250,000 for qualifying equipment.

Bonus depreciation is phasing down. In 2026, it’s 20% first-year depreciation on qualifying assets, down from 100% a few years back. You need a fixed asset register tracking purchase date, price, depreciation method, recovery period, annual depreciation, and remaining basis.

A contractor who buys a $350,000 excavator and doesn’t record it properly ends up either missing deductions or creating compliance problems. Usually both.

Payroll Gets Complicated Fast

Construction payroll is harder than most industries. Multiple labor classifications, prevailing wage requirements, union reporting, and certified payroll all add layers that standard payroll software doesn’t handle.

Certified Payroll

Contractors on federally funded projects must comply with the Davis-Bacon Act: prevailing wages and certified payroll reports (WH-347 forms). Texas state-funded projects have similar requirements. Each report shows every worker’s classification, hours, wage rate, and fringe benefits.

Union Payroll

Union contractors in Houston deal with collective bargaining agreements that dictate wage rates, overtime rules, and benefit contributions by trade. Plumbers, electricians, and ironworkers may all have different rates on the same project. Your bookkeeping system has to track those distinctions at the employee and job level.

Workers’ Comp

Workers’ comp premiums vary wildly by trade. A roofer and an office manager carry completely different risk profiles and rates. Accurate payroll records by classification matter for the annual workers’ comp audit. Misclassification gets you big premium adjustments in either direction.

For more on payroll mechanics and compliance, the requirements only multiply as you grow.

The Construction Chart of Accounts

A construction company’s chart of accounts looks different from a standard small business. You need accounts that support job costing, retainage, WIP, and equipment tracking.

Key accounts that differ from standard businesses:

Assets:

Retainage Receivable
Costs in Excess of Billings (Underbillings)
Construction Equipment
Accumulated Depreciation, Equipment

Liabilities:

Retainage Payable
Billings in Excess of Costs (Overbillings)

Revenue:

Contract Revenue
Change Order Revenue

Cost of Revenue:

Direct Labor
Materials
Subcontractor Costs
Equipment Costs
Other Direct Costs

Set this up right from the start. Restructuring a messy chart of accounts a year in is expensive and painful. Software like QuickBooks Online (Contractor Edition), Sage 100 Contractor, or Foundation Software is built for this. A generic QuickBooks setup won’t support real job costing without heavy customization.

Cash Flow: Construction’s Constant Battle

Construction has a well-earned reputation for cash flow problems. Long timelines, retainage holdbacks, and front-loaded material purchases create gaps between when money goes out and when it comes back.

A Houston subcontractor might spend $80,000 on materials, pay a crew for six weeks, and not see the first progress payment for 60 days. Add 10% retainage and the cash gap gets serious fast.

Surviving it depends on:

Billing schedules tied to realistic milestones
Submitting invoices the day a milestone is done
Retainage tracking with clear release timelines
Accounts payable timing aligned with incoming cash
Cash flow forecasting based on the WIP and billing projections

The contractors who survive Houston’s competitive market treat cash flow management as a bookkeeping function, not something they worry about after they’re already short.

Compliance and Recordkeeping

Construction faces regulatory requirements beyond normal business compliance.

Sales tax: Texas doesn’t tax most construction labor, but materials and certain supplies are taxable. The line between real property improvement (generally not taxable to the end customer) and tangible personal property installation creates gray areas that need careful documentation.

1099 reporting: GCs who pay subs more than $600 annually must issue 1099 forms. On bigger projects with dozens of subs, this is a significant year-end task. Collect W-9s before the first payment and save yourself the headache.

Lien waivers: Texas has specific mechanics lien laws protecting contractors, subs, and suppliers. Your books need to track lien waiver exchanges alongside payment records.

Insurance certificates: GCs must maintain current COIs from every sub. Not strictly bookkeeping, but many firms integrate insurance tracking into vendor management.

When to Get Specialized Help

Construction bookkeeping can be handled in-house, but the complexity usually outgrows what a general bookkeeper or the owner’s spare time can handle. The tipping point usually shows up when:

Annual revenue passes $1 million
You’re running more than three projects at once
Bonding requires audited or reviewed financial statements
Certified payroll becomes a regular thing
You’re spending more time on books than on business development

A bookkeeper without construction experience might reconcile the bank and pay bills just fine, but miss the job costing, WIP reporting, and retainage tracking that construction demands. Industry specialization matters here more than almost any other field.

The QBI deduction available to pass-through construction businesses adds another layer where proper bookkeeping directly affects tax savings.

Construction bookkeeping is detailed, but it follows the same logic as the work itself. Break the project into components, track each one carefully, reconcile everything at the end. The contractors who build reliable financial systems tend to be the same ones who build things that last.

At EZQ Group, we provide bookkeeping services built for Houston’s construction industry. Job costing, WIP reporting, retainage tracking, compliance documentation. Contact us to talk about what your company needs.