How to Do Construction Accounting for Specialty Trade Subcontractors

DEFINITION

percentage of completion method

Revenue recognition method that recognizes revenue proportional to job completion — the standard for long-term construction contracts. Formula: (costs incurred to date / total estimated costs) x contract value = earned revenue.

DEFINITION

chart of accounts

The categorized list of all financial accounts used to record transactions. Construction-specific accounts include job cost categories (labor, materials, equipment, subcontractors) and construction balance sheet items (retainage receivable, retainage payable, underbillings, overbillings).

DEFINITION

underbilling

When a contractor has earned more revenue than they have billed — creates an asset on the balance sheet (costs in excess of billings). Chronic underbilling indicates you're not invoicing aggressively enough relative to work completed.

DEFINITION

overbilling

When a contractor has billed more than they have earned — creates a liability on the balance sheet (billings in excess of costs). Some overbilling is normal as front-loaded billing; excessive overbilling signals financial risk to lenders and bonding companies.

Why Construction Accounting Is Harder Than Retail or Service Accounting

A plumber who owns a service business and a plumbing subcontractor who does commercial new construction run two different accounting systems — even if both use QuickBooks.

Service businesses sell time and parts. Revenue is recognized when a truck rolls. Job cost tracking is simple: what did the tech cost per hour, what did parts cost. The financials reflect the real business because income and expense happen at roughly the same time.

Long-duration construction contracts don’t work that way. A $2M electrical project that runs 18 months is partly billed, partly complete, partly collected, and partly retained — all at the same time. Standard accounting can’t represent that accurately. The percentage-of-completion method exists specifically because cash receipts are a bad proxy for construction revenue.

The other gap is cost traceability. A standard P&L tells you your labor cost last month was $87,000. A construction job cost report tells you $23,000 of that went to Job 104 and that job is now 12% over its labor budget. Without job-level cost tracking, you know you’re losing money but not where.

The WIP Schedule as the Monthly Checkpoint

The work-in-progress schedule is the most important financial report specialty trade subs don’t run consistently enough.

It forces a monthly reconciliation of every open job: what was estimated, what’s been spent, how complete the job is, what’s been billed, and what the resulting underbilling or overbilling position is. Underbillings are money you’ve earned but haven’t invoiced — an asset, but also a signal that your billing is running behind your work. Overbillings are money you’ve collected beyond what you’ve earned — a liability, and a potential cash flow trap if the job runs over its estimate.

Lenders and bonding companies read WIP schedules to assess financial health. A clean WIP schedule, reconciled monthly, signals that management has control over job financials. A messy one — or the absence of one — raises questions.

How Retainage Distorts Your Cash Position

Retainage is the portion of each payment application the GC holds back until project completion, typically 5-10% of the contract value. On a $1.5M mechanical contract, that’s $75,000 to $150,000 that belongs to you but isn’t in your bank account.

That gap between earned revenue and collected cash is real and it compounds across a project portfolio. A sub with five active jobs in the $500K-$2M range might have $200,000-$600,000 in retainage receivable at any given time. If that number isn’t tracked accurately and followed up on systematically at project closeout, it disappears into receivables aging and never gets collected.

Track retainage receivable separately from regular accounts receivable. Set a calendar reminder at every project closeout to confirm retainage release with the GC before releasing your own final retainage to subs. The money is yours — you have to go get it.