The problem every contractor recognises
Your profit and loss statement shows a solid margin for the quarter. Your bank balance says otherwise. Payroll is due Friday and you are deciding which supplier can wait another week. If this feels familiar, the issue is rarely that the work was unprofitable. It is that your books are not structured to tell you which jobs made money and when the cash from those jobs actually arrives.
Construction is one of the few industries where standard small business bookkeeping actively misleads you. A retail shop knows its margin the day it sells something. A contractor can be eighteen months into a project before anyone can say with confidence whether it worked.
Why generic bookkeeping breaks on construction
Revenue arrives out of step with costs
You buy materials in March, pay crews through April and May, and invoice on a progress schedule that may not settle until July. A cash-basis P&L will show a terrible March and a wonderful July, and neither number tells you anything useful about whether the job was priced correctly.
Retainage sits on the books as revenue you cannot spend
Most construction contracts hold back five to ten percent of each payment until the project closes out. That retainage is recognised as revenue, so it inflates your reported profit, but it is not in your account and may not arrive for months after substantial completion. Businesses that do not track retainage separately consistently overestimate their available cash.
Overhead allocated as a flat percentage hides your worst jobs
Spreading overhead evenly across jobs is simple and wrong. A job that consumed a disproportionate share of supervision, equipment time or rework carries the same overhead burden as one that ran cleanly. The clean job subsidises the problem job in your reporting, and you never learn which type of work to stop bidding.
What job costing actually requires
Job costing means every dollar of cost is coded to the job that incurred it, at the time it is incurred. In practice that means four things:
- A cost code structure that matches how you estimate. If your bids break work into labour, materials, subcontractors and equipment, your books must use the same categories. Otherwise you cannot compare actual against estimate, which is the entire point.
- Labour burden costed at its true rate. A field employee at 28 dollars an hour costs closer to 38 once payroll taxes, workers compensation, general liability and benefits are included. Costing labour at the base wage understates every job by roughly a third of its labour content.
- Committed costs tracked, not just paid costs. A signed subcontract or an issued purchase order is money spent, whether or not the invoice has arrived. Jobs that look under budget frequently just have invoices in transit.
- Change orders captured before the work happens. Unbilled change order work is the single most common source of margin that quietly disappears.
Work in progress: the report that tells the truth
The work-in-progress schedule is the one report that reconciles what you have earned against what you have billed. For each open job it compares costs incurred to date, the percentage of the contract that represents, the revenue you should have recognised, and what you have actually invoiced.
The difference between those last two numbers is where the story is:
- Underbilled means you have done more work than you have invoiced. You are financing your customer, and that financing is coming out of your working capital.
- Overbilled means you have invoiced ahead of the work. That is healthy for cash flow, but the money is not yet earned and spending it creates a hole later in the job.
A WIP schedule reviewed monthly catches a job going sideways while there is still contract left to correct it. Reviewed annually at tax time, it tells you what went wrong on work you finished nine months ago.
What good looks like
A construction business with its accounting in order can answer these questions on any given Monday:
- Which open jobs are tracking above and below their estimated margin, and by how much?
- How much cash is tied up in retainage, and when is each portion due for release?
- What is the total value of approved change orders not yet invoiced?
- Which project managers consistently bring work in on budget?
- What is the true fully burdened cost of an hour of field labour this quarter?
None of these require sophisticated software. They require a chart of accounts built for construction, disciplined cost coding, and someone reviewing a WIP schedule every month.
Where to start
If your books are not currently set up this way, the sequence that works is: restructure the chart of accounts around cost codes that mirror your estimating, calculate your real labour burden rate, build a WIP schedule for every open job, and then review it monthly against the original estimate.
The first month is uncomfortable, because it usually reveals that one or two jobs are performing considerably worse than anyone believed. That discomfort is the point. The alternative is finding out at year end, when the only thing left to do is absorb it.
TallyWise builds and maintains this structure for construction firms, including job costing, WIP reporting, retainage tracking and monthly review. You can read more about our construction accounting services, or book a call to talk through how your current books are set up.
