Construction

Forecasting Project Profitability: Tips for Contractors 

Profitability is one of the clearest indicators of a project’s success, yet it can be difficult to measure accurately while work is still underway. Material prices shift, labor needs evolve, schedules change, and unexpected conditions can influence costs long before a project is complete. Without a reliable forecasting process, contractors may not recognize developing problems until …

Profitability is one of the clearest indicators of a project’s success, yet it can be difficult to measure accurately while work is still underway. Material prices shift, labor needs evolve, schedules change, and unexpected conditions can influence costs long before a project is complete. Without a reliable forecasting process, contractors may not recognize developing problems until margins are already weakened. 

Strong profitability forecasting helps contractors understand where a project stands today and where it is likely headed. When supported by accurate data and practical financial tools, forecasting becomes an essential resource for guiding decisions throughout the life of the job. 

Start With Accurate Job Costing 

Profitability forecasts are only as strong as the data behind them. Job costing must reflect what is actually happening on site, not just what was planned. This includes labor hours, material usage, subcontractor costs, and equipment time. 

Accurate job costing helps contractors: 

  • Compare real costs to estimates 
  • Identify cost categories that are trending higher than expected 
  • Understand how field decisions affect financial outcomes 

This information provides the foundation for reliable forecasts. 

Use Work-in-Progress Reports to Track Progress 

Work-in-progress reports help contractors understand how costs and revenue align with project completion. WIP reporting highlights overbilling, underbilling, and the percentage of work completed, all of which influence profitability. 

When reviewed regularly, WIP reports help contractors adjust staffing, reschedule activities, or revise budgets before problems grow. 

Evaluate Project Assumptions Throughout the Job 

Forecasting requires revisiting the assumptions that guided the original bid. Market prices, labor availability, and project conditions rarely remain static from start to finish. Contractors should periodically evaluate whether the assumptions behind their estimates still hold true. 

Questions that support this review include: 

  • Has labor been more or less efficient than expected? 
  • Are material prices higher than when the estimate was created? 
  • Have any subcontractors adjusted their pricing or availability? 
  • Are there scheduling delays that could increase costs? 

This type of evaluation helps contractors update forecasts with real-time information. 

Monitor Change Orders and Their Financial Impact 

Change orders often shift a project’s financial outlook. Even small adjustments can affect labor needs, material requirements, and job sequencing. To maintain accurate profitability forecasts, contractors should track the financial impact of change orders as soon as they occur. 

When captured early, these changes can be incorporated into revised budgets and forecasts, helping contractors avoid surprises later in the project. 

Compare Estimated Profit to Earned Profit 

Estimated profit reflects what contractors expect to earn when the project is complete. Earned profit reflects what has been achieved to date based on progress and actual costs. Comparing these two helps contractors determine whether they are on track or drifting from their projections. 

A significant variance between estimated and earned profit may signal the need for schedule adjustments, budget revisions, or resource changes. 

Use Historical Data to Improve Future Forecasts 

Completed projects offer valuable insight. By reviewing past performance, contractors can identify trends such as recurring cost overruns, underestimated labor categories, or consistent delays in certain phases of work. 

Historical data strengthens future forecasting by helping contractors: 

  • Build more accurate estimates 
  • Anticipate common problem areas 
  • Improve staffing and scheduling decisions 
  • Refine procurement strategies 

This continuous improvement strengthens profitability over time. 

Strengthen Communication Between Accounting and the Field 

Forecasting is most accurate when financial information and field activity stay connected. Regular communication between project managers, accounting staff, and field supervisors ensures that both teams work with the same understanding of project status. This helps contractors adjust forecasts quickly and maintain a clear view of the project’s trajectory. 

Building Confidence in Project Performance 

Profitability forecasting gives contractors the visibility they need to manage projects with confidence. When supported by accurate job costing, clear reporting, and open communication, forecasting becomes a powerful tool for guiding decisions and protecting margins. 

At DBC, we work with construction companies to build forecasting processes that support stronger financial outcomes and long-term growth. If you would like to strengthen your approach to project profitability, our team is here to help. 

Managing Cash Flow in Work-In-Progress Construction Projects 

Cash flow is one of the most critical elements of any construction project, and long-term projects place even greater pressure on a contractor’s financial structure. These projects often span multiple seasons, require large upfront investments, and fluctuate in cost as labor and material needs evolve. Even profitable projects can become difficult to manage if cash …

Cash flow is one of the most critical elements of any construction project, and long-term projects place even greater pressure on a contractor’s financial structure. These projects often span multiple seasons, require large upfront investments, and fluctuate in cost as labor and material needs evolve. Even profitable projects can become difficult to manage if cash flow is not monitored closely. 

Strong cash flow management helps contractors maintain steady operations, keep projects moving, and avoid unnecessary financial strain. With the right planning and oversight, long-term work becomes more predictable and far easier to manage. 

Understanding Why Long-Term Projects Strain Cash Flow 

Long-term construction projects introduce unique challenges that shorter jobs rarely experience. Contractors may face: 

  • Extended payment cycles tied to specific milestones 
  • Rising material or equipment costs over time 
  • Delays that affect both scheduling and billing 
  • Changes in scope that alter the financial structure of the job 

Because these projects evolve continuously, cash flow must be monitored just as consistently. 

Build a Cash Flow Forecast That Follows the Project 

A detailed cash flow forecast should mirror the life cycle of the project. Forecasting helps contractors anticipate when expenses will occur, when payments are expected, and where cash shortages may develop. 

A strong forecast typically includes: 

  • Planned labor and subcontractor costs by phase 
  • Expected material purchases 
  • Billing schedules tied to milestones or monthly progress 
  • Contingency amounts for unexpected changes 

Updating the forecast as the project progresses helps contractors make decisions early rather than reacting after a problem appears. 

Strengthen Billing Practices 

Billing practices significantly influence cash flow in long-term projects. Delayed billings, underbillings, or unclear documentation can slow payments and create difficulties in meeting upcoming costs. 

Contractors benefit from reviewing whether their billing practices: 

  • Align with contract terms 
  • Reflect work completed to date 
  • Include change orders promptly 
  • Follow a consistent monthly or milestone schedule 

Accurate and timely billing helps keep cash coming into the business at the pace needed to support the work. 

Monitor Work-in-Progress and Overbilling 

Work-in-progress reporting is an important tool for tracking cash flow. Overbilling and underbilling both influence the financial health of a project. 

  • Overbilling may improve short-term cash flow, but if costs later exceed expectations, it can reduce billing available in later phases. 
  • Underbilling restricts cash flow because work is completed without a corresponding payment. 

Monitoring WIP results helps ensure billing and work progression remain in balance. 

Manage Material Purchases Strategically 

Material pricing can shift significantly over long project cycles. Contractors may need to analyze whether materials should be purchased early, in phases, or through negotiated agreements with suppliers. 

Strategic purchasing decisions help avoid unexpected cost spikes and support better cash flow planning. 

Maintain Strong Communication With Subcontractors 

Subcontractor performance and timing affect both project progress and cash flow. Clear communication about scheduling, payment expectations, and documentation requirements helps prevent delays that can slow down billing. 

When subcontractors submit their paperwork consistently, contractors can bill earlier and more accurately. 

Protect Cash Flow During Change Orders 

Change orders are common in long-term work, but they can strain cash flow when not handled promptly. Costs related to changes should be documented and submitted quickly so that billing reflects the actual work being performed. 

A consistent change order process helps contractors: 

  • Maintain accurate budgets 
  • Prevent unapproved work from accumulating 
  • Ensure payment keeps pace with job progression 
Review Contract Terms Before the Project Begins 

Contract terms shape how cash flows throughout the project. Reviewing key components before work starts helps contractors avoid issues later. Important elements include billing frequency, retainage, milestone definitions, and payment turnaround times. 

Understanding these terms allows contractors to plan ahead and build a realistic cash strategy. 

Bringing Stability to Long-Term Projects 

Managing cash flow in long-term construction projects requires a combination of careful planning, consistent oversight, and clear communication. When contractors maintain strong forecasting, monitor job progress closely, and follow disciplined billing practices, they create a financial structure that supports long-term success. 

At DBC, we help construction companies strengthen their cash flow strategies, build reliable forecasting models, and create financial processes that support confident decision making. If you would like guidance on improving cash flow management for your long-term projects, our team is ready to help. 

Using Work-in-Progress Reports to Improve Profitability 

A construction project is always in motion. Labor hours fluctuate, material deliveries shift, and costs evolve as work progresses. In this environment, guessing where a project stands financially is not enough. Contractors need a clear, consistent way to understand whether they are ahead, behind, or right on track. This is where work-in-progress reports become essential. A strong WIP …

A construction project is always in motion. Labor hours fluctuate, material deliveries shift, and costs evolve as work progresses. In this environment, guessing where a project stands financially is not enough. Contractors need a clear, consistent way to understand whether they are ahead, behind, or right on track. This is where work-in-progress reports become essential. 

A strong WIP report shows the financial health of a project at any point in time. It reveals how costs compare to estimates, how much revenue should be recognized, and whether billing lines up with the work completed. When used consistently, WIP reporting becomes one of the most powerful tools for protecting profitability. 

What a WIP Report Measures 

A WIP report connects three key elements: progress, cost, and billing. By comparing how much work has been completed with how much has been billed and spent, contractors gain insight into the true status of each project. 

A well-prepared WIP report helps answer questions such as: 

  • Are we recognizing revenue accurately based on project progress? 
  • Are we overbilled or underbilled? 
  • Are costs rising faster than expected? 
  • Are we on pace to meet the original margin? 

These answers help contractors make decisions before small problems become larger ones. 

Identifying Overbilling and Underbilling 

WIP reports highlight whether billing aligns with the actual progress of the job. Both overbilling and underbilling reveal important financial information: 

  • Overbilling may improve cash flow in the short term but can reduce future billings and strain project margins if costs are higher than expected. 
  • Underbilling signals that work has been completed but not billed, which can restrict cash flow and mask profitability issues. 

Tracking these indicators helps contractors adjust billing practices and maintain a steadier financial position. 

Keeping Projects Aligned With Estimates 

WIP reports compare actual costs to estimated costs, making it easier to identify areas where the project is drifting off budget. Early detection is critical. When labor hours exceed expectations or material costs rise quickly, contractors can take corrective action before the issue affects the entire project. 

Accountants play an important role in this process by helping contractors update projections and ensure costs are allocated correctly. 

Supporting More Accurate Revenue Recognition 

Many contractors use the percentage-of-completion method for revenue recognition. WIP reports provide the information needed to apply this method accurately, ensuring that revenue reflects actual progress rather than cash received. 

This helps produce financial statements that reflect the real status of each job, which is valuable for owners, lenders, and bonding agents. 

Improving Communication Between the Office and the Field 

WIP reporting strengthens the connection between financial records and field activity. When project managers, superintendents, and accounting staff review WIP results together, they often uncover issues that were not visible from a single perspective. 

A stronger communication loop can reveal: 

  • Delays that need to be addressed 
  • Subcontractor performance concerns 
  • Material shortages that could affect schedule or cost 
  • Opportunities to improve forecasting for future jobs 

These insights improve both current work and long-term planning. 

Supporting Long-Term Profitability 

A consistent WIP process allows contractors to evaluate performance across multiple projects. Over time, patterns emerge that help refine estimating, staffing, and material planning. 

For example, WIP reviews may show that: 

  • Certain types of work consistently produce stronger margins 
  • Specific stages of a project tend to exceed estimated labor 
  • Profitability varies depending on crew size or subcontractor choice 

These findings help owners make strategic decisions about the kinds of projects they pursue and how they allocate resources. 

Building Confidence in Your Financial Picture 

When WIP reporting is done well, it becomes more than a financial document. It becomes a roadmap for how projects are performing and where adjustments may be needed. The transparency it provides helps contractors maintain profitability, plan ahead, and make decisions with greater confidence. 

At DBC, we help construction companies strengthen their WIP reporting processes, interpret results, and build financial systems that support long-term success. If you would like guidance on improving your WIP reporting or connecting it more closely to your project management practices, our team is here to help. 

Cost Overruns: How Accountants Help You Prevent Budget Blowouts 

Cost overruns can take a project that looked profitable on paper and turn it into a challenge the moment work begins. Material costs shift, labor availability changes, schedules tighten, and unexpected site conditions surface. Even experienced contractors know how quickly a job can drift off budget when several small issues stack up at once. These pressures …

Cost overruns can take a project that looked profitable on paper and turn it into a challenge the moment work begins. Material costs shift, labor availability changes, schedules tighten, and unexpected site conditions surface. Even experienced contractors know how quickly a job can drift off budget when several small issues stack up at once. These pressures make it essential to have financial systems that catch problems early and support clear, confident decision making. 

While cost overruns are common in construction, they do not have to be routine. With the right oversight and financial structure, contractors can anticipate risks, protect margins, and maintain control over project performance. Accountants play a key role by creating the visibility and clarity needed to keep budgets steady from start to finish. 

Strengthening Job Costing to Catch Issues Early 

Accurate job costing is the foundation of any effort to control project spending. When labor, materials, equipment, and subcontractor costs are tracked consistently, contractors gain a clearer view of how a project is performing in real time. 

Accountants help improve job costing by: 

  • Establishing detailed cost codes 
  • Ensuring costs are applied correctly and on time 
  • Reviewing actual costs against estimates 
  • Highlighting trends that may signal early overruns 

These steps help contractors move from reactive to proactive decision making. 

Improving Estimates and Budget Assumptions 

Many cost overruns begin long before a project starts. Underestimated labor hours, incomplete scope descriptions, or insufficient contingencies can create a budget that is difficult to follow once work begins. 

Accountants help refine estimates by reviewing historical job data, evaluating past performance against projections, and identifying cost categories where overruns occur frequently. Over time, this creates a more accurate estimating process that reduces surprises in the field. 

Monitoring Work in Progress for Real-Time Visibility 

Work in progress (WIP) reporting is one of the most important tools for preventing budget blowouts. A strong WIP report compares the percentage of work completed with the costs incurred to date. When these two do not align, it may indicate job delays, underestimated labor, or billing issues. 

Accountants use WIP reports to: 

  • Track profitability throughout the project 
  • Identify underbilling or overbilling 
  • Highlight costs that are rising faster than expected 
  • Provide owners with clear, actionable insights 

Regular WIP meetings help ensure that financial information stays connected to what is happening on site. 

Enhancing Cash Flow Management 

Cash flow problems can contribute to cost overruns by delaying material purchases, limiting available labor, or forcing rushed decisions. Accountants help contractors plan for cash needs by analyzing projected expenses, contract terms, and payment timing. 

A structured cash flow plan helps contractors: 

  • Prepare for high-cost phases of the project 
  • Avoid delays caused by funding gaps 
  • Maintain steady operations even when billing cycles fluctuate 

This stability supports stronger project execution and cost control. 

Improving Change Order Processes 

Change orders are unavoidable in construction, but without strong processes they can quickly contribute to budget overruns. When changes are not documented promptly or priced accurately, costs can accumulate without being captured in the contract. 

Accountants help strengthen change order management by ensuring: 

  • Costs associated with changes are tracked separately 
  • Pricing reflects both direct and indirect impacts 
  • Documentation is submitted in a timely manner 
  • Financial records match field activity 

Clear processes protect profitability and reduce disputes with clients. 

Reviewing Contract Terms for Hidden Risks 

Contracts influence how risk is shared, when payments are received, and how unexpected costs are handled. Accountants help contractors evaluate terms such as retainage, billing schedules, pricing structures, and scope definitions. Understanding these details upfront helps prevent misunderstandings and financial strain as the project progresses. 

Learning From Completed Projects 

Post-project reviews offer some of the most valuable insights for preventing future overruns. Accountants work with contractors to compare estimated costs to actual spending and identify where differences occurred. 

A well-run review may highlight issues such as: 

  • Labor hours consistently underestimated 
  • Material cost volatility not included in the budget 
  • Inefficient subcontractor coordination 
  • Inaccurate cost allocations in job costing 
  • Delays not reflected in the project timeline 

These lessons help contractors build stronger processes for future jobs. 

Bringing Financial Clarity to Construction Projects 

Cost overruns may be common, but they can be significantly reduced with the right systems in place. Accountants bring structure, visibility, and financial discipline that help contractors keep projects on track and maintain profitability. When field experience and financial insight work together, both budgets and timelines become more predictable. 

At DBC, we partner with construction companies to strengthen budgeting processes, improve project forecasting, and build financial systems that support long-term growth. If you would like guidance on preventing cost overruns or evaluating your current job costing processes, our team is here to help. 

Sales Tax Considerations in Multi-State Construction Projects

 Multi-state construction projects can create sales and use tax issues that do not show up in single-state work. Each state has its own rules, and those rules can change depending on the type of project, how materials are purchased and delivered, how invoices are structured, and whether equipment moves across state lines. When these details are not …

 Multi-state construction projects can create sales and use tax issues that do not show up in single-state work. Each state has its own rules, and those rules can change depending on the type of project, how materials are purchased and delivered, how invoices are structured, and whether equipment moves across state lines. 

When these details are not addressed early, contractors can run into compliance gaps, unexpected tax cost, or project delays. A little upfront planning can often prevent much bigger problems later. 

Start With Each State’s Definition of Taxable Activity 

Sales and use tax rules vary more than most contractors expect. In one state, materials may be taxable at the time of purchase. In another, the contractor may be treated as the end user and responsible for use tax. Some states tax certain construction-related services, while others tax only tangible materials. 

Before starting work in a new state, it is worth confirming: 

  • How the state treats contractors for tax purposes 
  • Whether the project involves taxable labor or services 
  • Which rules apply to your project type 

Even small differences in state definitions can affect job costs and pricing. 

Materials: Where Most Mistakes Happen 

Materials are often the biggest source of confusion in multi-state projects, especially when delivery, billing, and jobsite locations do not line up cleanly. 

Depending on the state: 

  • Contractors may be required to pay sales tax when purchasing materials, even if the customer is billed separately 
  • Contractors may be able to purchase materials tax-free if the transaction qualifies as a resale 
  • Tax may apply based on delivery location, jobsite location, or where the materials are installed 

The most important step is maintaining clean documentation. Material invoices, delivery addresses, and jobsite records should support how tax was handled. 

Use Tax: Easy to Miss, Hard to Fix Later 

Use tax becomes an issue when sales tax was not collected at the time of purchase, but the materials end up being used in a state where tax is due. This is one of the most common compliance gaps we see in multi-state work. 

Use tax issues often come up when: 

  • Materials are purchased tax-free but installed in a taxable state 
  • Materials are bought in one state and moved to another during the project 
  • Temporary storage changes where tax responsibility lands 

When the project is already underway, fixing use tax problems can take more time and create more exposure. Tracking material movement early is the easier route. 

Installation Labor and Invoicing Structure Matter 

Not every state treats installation services the same way. Some tax installation labor. Others do not. In some cases, labor is taxable only when it is billed as part of a combined materials invoice. 

For multi-state contractors, it helps to confirm: 

  • Whether installation labor is taxable 
  • Whether repairs and maintenance are taxed differently than new construction 
  • Whether invoices should separate material and labor charges 

Clear invoice structure can reduce audit questions and make compliance more straightforward. 

Equipment Creates Its Own Tax Trail 

Equipment that moves across state lines can create additional tax responsibilities, especially on longer projects. States may apply tax based on equipment location, usage, or how long it stays in-state. 

Contractors should confirm whether: 

  • Bringing equipment into a state triggers use tax 
  • Owned equipment and rented equipment are treated differently 
  • Long-term projects require registration or recurring reporting 

Because equipment often moves between jobs, tracking where it is used matters more than many contractors realize. 

Exemptions Can Affect Bids and Pricing 

Some projects may qualify for sales tax exemptions, but those exemptions are not automatic. They vary by state and may depend on the customer, the project type, or the documentation provided. 

Common exemption categories include: 

  • Government projects 
  • Not-for-profit organizations 
  • Certain manufacturing or industrial projects 
  • Affordable housing and public works programs 

Confirming exemption requirements before bidding helps avoid pricing errors and billing issues later. 

Build a Simple Multi-State Tax Process 

Multi-state sales and use tax becomes more manageable when there is a repeatable process in place. A strong starting point includes: 

  • Tracking where materials are purchased, delivered, and installed 
  • Reviewing state rules during bidding and project setup 
  • Separating material and labor clearly on invoices when needed 
  • Maintaining documentation that supports tax decisions 

With better structure, multi-state projects become easier to forecast and less likely to create surprise costs. 

Staying Confident in Multi-State Work 

At DBC, we work with construction companies to navigate multi-state tax requirements, strengthen internal processes, and support long-term planning. If you would like help evaluating your approach to multi-state sales and use tax, we invite you to contact us. 

Key Differences Between Cash and Accrual Accounting for Contractors 

Choosing an accounting method is one of the most important financial decisions a construction business makes. It affects when income shows up on your books, how clearly you can track job performance, and how much confidence you have in your numbers. For contractors, this decision matters even more because construction work rarely follows a simple …

Choosing an accounting method is one of the most important financial decisions a construction business makes. It affects when income shows up on your books, how clearly you can track job performance, and how much confidence you have in your numbers. 

For contractors, this decision matters even more because construction work rarely follows a simple pattern. Materials are purchased before a job is complete. Labor costs hit weekly. Payments may arrive in uneven stages. The method you choose should support the realities of how you actually operate. 

This article breaks down the difference between cash and accrual accounting and why the choice impacts more than just bookkeeping. 

How the Cash Method Works 

With the cash method, you recognize income when you receive payment and expenses when you pay them. It is simple, widely used, and often a good fit for smaller contractors or businesses running shorter jobs. 

Many contractors like the cash method because it mirrors what they see in the bank account. When money comes in, it is recorded as income. When you pay bills, it is recorded as an expense. That can make day-to-day cash management feel more straightforward. 

The downside is that the cash method can hide what is really happening inside a job. 

A few common examples: 

  • If a customer delays payment, your revenue looks lower even if the work is complete. 
  • If you pay for materials up front, expenses may spike in one month even if the job is ongoing. 
  • If you have multiple jobs running at once, it can be hard to tell which ones are actually profitable. 

The cash method is simple, but it does not always provide a clean view of job performance. 

How the Accrual Method Works 

With the accrual method, you recognize income when it is earned and expenses when they are incurred, regardless of when cash moves. 

This approach is often more useful for construction businesses because it matches revenue and costs to the work being performed. That makes it easier to evaluate the true financial position of a job over time. 

Contractors often choose accrual accounting when they need: 

  • clearer job-costing and profitability reporting 
  • better matching of revenue and expenses 
  • stronger reporting for lenders and bonding agents 
  • financial statements that support long-term planning 

Accrual accounting takes more effort to maintain, but it generally gives a more reliable picture of performance, especially for multi-month projects. 

What Contractors Should Watch For 

Both methods can be correct, but they tell different stories. 

Here is what that looks like in practice: 

Under the cash method, a contractor may look highly profitable during a month when collections are strong, even if job costs are rising or projects are running behind. 

Under the accrual method, revenue and costs are tied to the work performed, even if the customer has not paid yet. 

That difference affects how early you can spot problems like: 

  • cost overruns 
  • underbilling 
  • delayed collections 
  • jobs that “feel busy” but are not producing profit 

If you rely on your financial reports to make staffing, pricing, or bidding decisions, those timing differences matter. 

Tax Planning Considerations 

Your accounting method also impacts when income is recognized for tax purposes. 

With the cash method, taxable income can often be pushed later if payments are received later. With the accrual method, taxable income may be recognized earlier, based on billing or work completed. 

A few things contractors should keep in mind: 

  • Large late-year billings can increase taxable income under accrual reporting. 
  • Delayed collections may reduce taxable income under cash reporting, even when the work is complete. 
  • Certain contractors may be required to use accrual accounting or percentage-of-completion based on revenue levels, entity structure, or contract type. 

This is why the “best” method is not always just the easiest one. It should support both operational decision-making and tax planning. 

Choosing the Right Method for Your Business 

There is no one-size-fits-all answer. The right accounting method depends on how your business runs today and where you are headed next. 

A few factors to consider: 

Project length and complexity 
If your jobs stretch across multiple months or phases, accrual reporting often gives a clearer picture. 

Cash flow needs 
If cash is tight and you need a simple system to track what is available right now, the cash method can work well in the early stages. 

Reporting requirements 
Bonding agents, lenders, and larger customers often prefer accrual-based financial statements because they reflect job performance more consistently. 

Many contractors eventually move from cash to accrual as they grow, take on larger jobs, or need better reporting. The key is making that shift intentionally, with the right structure in place. 

Bringing Clarity to Your Financial Reporting 

Understanding the difference between cash and accrual accounting helps contractors make better decisions, plan more effectively, and avoid surprises. The right method supports job-level visibility, strengthens tax planning, and makes it easier to track profitability over time. 

At DBC, we help construction companies evaluate their accounting methods, understand the tax impact, and set up financial reporting that fits the way construction actually works. If you would like help choosing the right method or improving your current setup, we invite you to contact us. 

Understanding the Percentage-of-Completion Method in Construction Accounting 

Construction projects rarely begin and end within the same accounting period. Work may stretch across months or even years, and costs often do not align neatly with billing or cash receipts. These realities make revenue recognition one of the most important financial decisions a construction company must address. The percentage-of-completion method is widely used …

Construction projects rarely begin and end within the same accounting period. Work may stretch across months or even years, and costs often do not align neatly with billing or cash receipts. These realities make revenue recognition one of the most important financial decisions a construction company must address. The percentage-of-completion method is widely used in the industry because it gives a clearer, more accurate picture of financial performance as work progresses. 

For contractors of all sizes, understanding how this method works can improve project planning, financial forecasting, and long-term decision making. 

What the Percentage-of-Completion Method Measures 

The percentage-of-completion method recognizes revenue and expenses based on the portion of work completed during a specific period. Instead of waiting until a project is finished, income and costs are recorded steadily over time. 

This method benefits contractors because it: 

  • Aligns revenue with the work performed 
  • Reduces large swings in income across reporting periods 
  • Provides more accurate financial information for lenders and bonding agents 

For businesses managing active project pipelines, this steady recognition helps create a more predictable financial picture. 

How Completion Percentage Is Calculated 

There are multiple ways to measure progress, but many contractors use the cost-to-cost approach. This compares actual costs incurred to the project’s total estimated costs. 

For example, if a project is expected to cost 1 million dollars and your team has incurred 400,000 dollars to date, the project is considered 40 percent complete. Forty percent of the contract revenue would then be recognized in the financial statements. 

While straightforward, this approach depends heavily on accurate job costing and consistent cost tracking. 

Why Job Costing Matters 

The percentage-of-completion method is only as reliable as the information that supports it. If labor, materials, equipment, or subcontractor costs are not recorded accurately and timely, the calculated percentage of completion may not reflect the true status of the project. 

Reliable job costing helps contractors: 

  • Identify issues early, such as overruns or delays 
  • Adjust projections based on real-time information 
  • Communicate clearly with lenders, bonding agents, and project partners 

Job costing becomes a foundation for both accurate reporting and better operational decisions. 

How This Method Supports Long-Term Planning 

One of the strengths of the percentage-of-completion method is that it highlights trends. Contractors can see how costs and revenue evolve as the project progresses instead of waiting for the final outcome. This helps owners plan cash flow, adjust staffing, and anticipate material needs with greater confidence. 

It can also reveal whether estimates need to be updated. If costs begin to rise faster than expected, issues can be addressed before they impact the final margins. 

Tax Implications for Contractors 

Some contractors are required to use the percentage-of-completion method for tax reporting, particularly for larger or long-term projects. Others may have the option to choose among different accounting methods depending on their business size and project mix. 

Understanding these rules is important because the method used for tax purposes affects when income is recognized and how taxable profit is calculated. 

A review of your accounting method helps confirm that you are meeting requirements while managing tax liability effectively. 

Challenges Contractors Should Be Aware Of 

While the percentage-of-completion method provides valuable insight, it also demands discipline. Potential challenges include: 

  • Difficulties estimating total project costs early on 
  • Delays in recording job costs or change orders 
  • Overbilling or underbilling that may distort reported results 
  • Project delays that require adjustments to cost forecasts 

These issues highlight the importance of clear processes, consistent reporting, and strong internal communication. 

Creating Clarity in Construction Accounting 

The percentage-of-completion method allows contractors to track performance with greater accuracy and transparency. When supported by reliable job costing and thoughtful project management, it becomes a powerful tool for financial decision making. 

At DBC, we help construction companies evaluate their accounting methods, strengthen job costing systems, and build financial processes that support long-term growth. If you would like guidance on implementing or improving the percentage-of-completion method, our team is ready to help. 

 
 

Tax Strategies for Construction Contractors 

Tax planning plays a critical role in the financial health of any construction business. Contractors face unique challenges, from long project timelines to fluctuating material costs and changing labor needs. These variables create a tax landscape that looks very different from traditional service industries. With thoughtful planning and clear financial processes, contractors can reduce tax liability, …

Tax planning plays a critical role in the financial health of any construction business. Contractors face unique challenges, from long project timelines to fluctuating material costs and changing labor needs. These variables create a tax landscape that looks very different from traditional service industries. With thoughtful planning and clear financial processes, contractors can reduce tax liability, strengthen cash flow, and improve long-term stability. 

Effective tax strategy is not simply about minimizing taxes. It is about creating a financial structure that supports predictable growth, clearer decision making, and stronger project performance. 

Understand Your Accounting Method 

A contractor’s tax position begins with the accounting method they use. Many contractors underestimate how much this decision affects taxable income, cash flow, and financial reporting. The right method depends on the size of the business, project length, and how revenue is earned. 

Contractors commonly use one of the following methods: 

  • Cash method, which recognizes revenue when received and expenses when paid. 
  • Accrual method, which records revenue when earned and expenses when incurred. 
  • Percentage-of-completion method, which recognizes income based on project progress. 
  • Completed contract method, which recognizes income only when a project is finished. 

Choosing the method that aligns with your project mix and financial goals can significantly influence your tax liability. 

Use Job Costing to Your Advantage 

Accurate job costing is essential for both project profitability and tax planning. When material, labor, equipment, and subcontractor costs are tracked consistently, contractors gain a clearer view of which expenses can be deducted and which must be capitalized. 

Better job costing also improves forecasting. When the true cost of a job becomes clearer, contractors can plan ahead for tax obligations tied to project timing and revenue recognition. 

Take Advantage of Depreciation Opportunities 

Construction companies invest heavily in vehicles, tools, heavy equipment, and technology. Many of these purchases qualify for accelerated depreciation. Year-end planning often provides opportunities to: 

  • Review equipment needs for upcoming projects 
  • Identify assets that may qualify for Section 179 or bonus depreciation 
  • Determine whether purchasing or leasing is the more tax-efficient option 

These decisions can reduce taxable income in the current year and support operational needs. 

Review Your Structure for Tax Efficiency 

The business entity you choose influences how income flows, how taxes are calculated, and how future growth is managed. Sole proprietorships, partnerships, LLCs, and S corporations all carry different tax implications. 

Contractors often review their structure when they begin hiring more employees, taking on larger projects, or planning for succession. A periodic evaluation helps ensure the business remains aligned with long-term goals. 

Plan for Subcontractor Compliance 

Subcontractor relationships are central to construction work. They also bring tax responsibilities that require careful oversight. Contractors should confirm that subcontractors: 

  • Provide accurate W-9 forms 
  • Are classified correctly as contractors rather than employees 
  • Receive timely 1099 filings when required 

Accurate documentation protects your business and reduces the risk of penalties. 

Analyze Project Timing for Tax Impact 

Project timing influences when revenue and expenses appear on a tax return. Contractors who understand how timing affects the bottom line can make informed decisions about when to start certain phases, purchase materials, or schedule labor. 

Strategic timing can improve cash flow, reduce taxable income, and support a more predictable financial year. 

Stay Current on Credits and Incentives 

Construction companies may qualify for a variety of federal or state incentives. These can apply to energy-efficient building, equipment purchases, or hiring in certain categories. While these opportunities vary, a yearly review helps ensure nothing is overlooked. 

Build a Year-Round Tax Plan 

The most effective tax strategies come from consistent, year-round planning rather than last-minute decisions. Contractors benefit from reviewing job performance, project backlog, cash flow patterns, equipment needs, and financial forecasts throughout the year. This proactive approach supports both compliance and long-term growth. 

At DBC, we help construction companies build tax strategies that reflect their operational reality. Our team works closely with contractors to strengthen financial processes, review tax opportunities, and create systems that support clear decision making.

If you would like to discuss your tax strategy or explore ways to improve your financial planning, we are here to help. 

About us

De Boer, Baumann & Company provides professional accounting, tax, and business advisory services to individuals and businesses in West Michigan and the surrounding areas. With expertise in a variety of industries, DBC specializes in comprehensive and innovative solutions to help clients achieve their financial goals.