Bookkeeping for construction contractors

What is job costing?

Assigning every direct cost to the job it belongs to: materials, labor hours and payroll costs, subcontractors, equipment use and permits. Comparing each job's costs with its contract price shows the margin, and comparing with the estimate shows where bids are off. Accounting software supports this through jobs, projects or classes.

Overhead that cannot be traced to one job, such as office rent, insurance and the owner's time on estimates, is tracked separately. Comparing total job margins with overhead shows whether the business is pricing jobs high enough overall, not just whether individual jobs are profitable.

How do progress billing and retainage work?

Progress billing invoices a share of the contract as work is completed. Retainage is a portion, often around 5% to 10%, that the customer holds back until the job is finished. Record retainage receivable separately from ordinary receivables, and retainage payable for amounts you hold back from subcontractors. See receivables and payables.

What do contractors need for subcontractors?

1. Collect Form W-9 before paying

   With the legal name and taxpayer number.

2. Check certificates of insurance

   To avoid workers' compensation and liability exposure.

3. Record payments by subcontractor and job

   For job costing and year-end forms.

4. Issue Forms 1099-NEC

   For 2026 payments of $2,000 or more, by January 31.

Check whether workers are really independent contractors. See independent contractor or employee and Form 1099-NEC.

How is sales tax on materials handled?

States differ. In many, contractors installing materials into real property are treated as the final consumers: they pay sales tax when buying materials and do not charge it to the customer. In others, contractors buy for resale and charge tax on materials billed separately. Check the rules where each job is located.

Keep supplier invoices showing tax paid, by job.

How is equipment recorded?

Trucks, tools and machinery are fixed assets, depreciated or expensed under Section 179 or bonus depreciation. Assign equipment costs to jobs where practical, using an hourly rate. See Section 179 vs bonus depreciation.

Keep fuel and repair costs for each vehicle and machine separately, which supports both job costing and the vehicle records the IRS expects.

What does a job cost report show?

Materials and labor ran over the estimate, cutting the margin by $7,000. Reviewing the report while the job is open, not after it ends, gives time to act or to raise change orders.

What about payroll on public works?

Contractors on many federally funded or state public works jobs must pay prevailing wages and submit certified payroll reports for those jobs. Set up payroll to track hours and rates by job, and keep the reports with the job file. See how to run payroll.

How are long-term contracts taxed?

Large contractors must generally use the percentage-of-completion method for long-term contracts. Small contractors, those with average annual gross receipts of $32 million or less for 2026, can generally use simpler methods, such as the completed-contract method, for construction contracts expected to be finished within two years. The choice affects when profit is taxed. See cash vs accrual accounting.

What is a work-in-progress report?

A schedule showing, for each open job, contract value, costs to date, estimated costs to finish, billing to date and the resulting over- or under-billing. Sureties and lenders often ask for it, and it is the best early warning of a job going over budget.

Update it monthly, after the books are closed, so it reflects every cost posted.

This guide is general information. It is not tax or legal advice for your situation.