Bookkeeping Pitfalls in Construction

Here's a hard truth mostcontractors learn the expensive way: the bookkeeper who's great for yourbuddy's retail store or your sister's dental practice will absolutely wreckyour construction company.

I've spent 15+ years as a CPAin the construction industry and have worked with hundreds of contractors. I'vewalked into companies where the books looked clean on the surface—until you dugin and realized no one had any idea whether jobs were making money, cash flowprojections were pure fiction, and the owner was flying blind on every bid.

The culprit? A well-meaningbookkeeper who treated construction accounting like every other business.

Construction isn't every otherbusiness. And if your bookkeeper doesn't understand that distinction, you'releaving money on the table—or worse, you're heading toward a cash crisis youwon't see coming until it's too late.

Let's talk about the seven mostcommon bookkeeping mistakes I see when general bookkeepers handle constructioncompanies—and why each one matters more than you might think.

1. Treating Job Costing Like an Optional Extra

In retail or professionalservices, you track revenue and expenses. Simple enough. In construction, ifyou're not tracking costs at the job level—and I mean every labor hour, everymaterial purchase, every subcontractor invoice, every piece of equipment—youhave no idea whether you're actually making money.

General bookkeepers often lumpeverything into broad expense categories. They'll tell you that you spent$400,000 on materials last quarter. What they won't tell you is which jobs atethrough their material budgets and which ones came in under. They can't tellyou that the Johnson project is hemorrhaging money because of scope creep,while the Martinez job is your most profitable work of the year.

Without job-level costing, youcan't identify which project managers are consistently delivering profitablework. You can't refine your estimating. You're essentially bidding your nextjob based on gut feel rather than actual historical data from similar projects.

The real cost: I've seencontractors consistently underbid by 8-12% for years because they had noaccurate job cost data. They thought they were competitive. They were actuallysubsidizing their clients.

2. Ignoring Work-in-Progress (WIP) Schedules

Ask a general bookkeeper aboutWIP schedules, and you'll probably get a blank stare. Ask a construction CFO,and they'll tell you it's one of the most critical reports in the business.

A WIP schedule compares howmuch of each job is complete (based on costs incurred versus total estimatedcosts) against how much you've billed. This comparison reveals whether you'reoverbilled or underbilled on each project—information that has massive implicationsfor your financial statements, your cash flow, and your bonding capacity.

When bookkeepers don'tunderstand WIP, several things go wrong. Revenue recognition becomes a mess—youmight be recognizing too much revenue on jobs that are actually losing money,or too little on profitable jobs that haven't been fully billed. Your balancesheet becomes unreliable. And when you go to your surety for bonding, they'llcatch these errors immediately. Nothing kills a bonding relationship fasterthan financial statements that don't reflect reality.

The real cost: Contractorshave lost bonding capacity—and the ability to bid on larger projects—becausetheir books didn't properly account for WIP adjustments. That's not abookkeeping error. That's a ceiling on your growth.

3. Mishandling Retainage

Retainage is one of thoseconstruction-specific realities that trips up general bookkeepers constantly.When a GC withholds 10% of your payment until project completion, that's notlost revenue—it's an asset you're owed. But it needs to be tracked separatelyand accounted for correctly.

I've seen bookkeepers recordthe full invoice amount as revenue, then get confused when the payment comes inshort. I've seen others not record the retainage receivable at all, whichunderstates your assets. Some accidentally expense it. Others let retainagereceivables sit on the books for years after projects close because no onetracked whether it was actually collected.

And retainage cuts both ways—ifyou're a GC holding retainage from your subs, that's a liability you owe, notcash you get to keep. Bookkeepers who don't understand construction sometimestreat that withheld cash as profit. It's not.

The real cost: Retainagerepresents real money—often 5-10% of your total receivables. Lose track of it,and you're leaving cash on the table. Misstate it on your financials, and yourbanker and surety will have questions.

4. Botching Progress Billing and AIA Documentation

Construction billing isn't likesending an invoice for services rendered. Progress billing requires documentingpercentage of completion, tracking previous billings, accounting for storedmaterials, and often using industry-standard AIA forms that have their ownlogic and requirements.

A bookkeeper unfamiliar withAIA G702 and G703 forms will struggle to reconcile what was billed against whatwas earned. They won't understand the relationship between the schedule ofvalues and progress payments. They'll have trouble tracking change orders andhow those affect the contract amount and billing.

This creates friction with yourclients (who expect properly formatted pay applications), delays in payment(because documentation doesn't match up), and internal confusion about how muchrevenue to recognize.

The real cost: Billingerrors and delays directly impact cash flow. In an industry where cash isoxygen, a bookkeeper who can't navigate progress billing is actively slowingyour ability to collect what you've earned.

5. Failing to Track Change Orders Properly

Change orders are where jobsmake or lose money. A project might bid tight, but if you're disciplined aboutcapturing and billing change orders, you can turn a break-even job into aprofitable one. Miss them, and you're doing extra work for free.

General bookkeepers often don'tunderstand the workflow. A change order isn't just an accounting entry—itaffects the contract value, the schedule of values, the cost estimates, and thebilling. It needs to be tracked from approval through completion throughbilling through payment.

I've audited books where changeorders were verbally approved and completed but never billed. I've seen changeorders billed but never added to the contract value, making job profitabilityreports meaningless. I've seen approved change orders sitting in email threads,never making it into the accounting system at all.

The real cost: Theaverage change order represents genuine additional value you've provided. Whenthese fall through the cracks—whether unbilled or untracked—that's money youearned but will never collect.

6. Misclassifying Labor Costs and Ignoring Certified Payroll Requirements

Construction labor isn't oneline item. You have direct labor (workers on the job), indirect labor(supervisors, project managers), and overhead labor (office staff). These needto be classified correctly for job costing to mean anything—and for your bidson future work to be accurate.

Beyond classification, there'scompliance. If you work on prevailing wage jobs—government contracts, publiclyfunded projects—you're dealing with certified payroll requirements, Davis-Baconcompliance, and union reporting. A bookkeeper who doesn't understand theserequirements puts you at risk of compliance violations, back-pay claims, anddebarment from future public work.

Then there's workers' comp.Different work classifications carry different rates. If your bookkeeperdoesn't properly code employees by job type and role, your workers' comp auditwill either result in a surprise bill or you'll have been overpaying for years.

The real cost: Labor istypically 25-50% of project costs. Get labor accounting wrong, and every jobcost report, every estimate, and every bid is built on a faulty foundation.

7. Producing Financial Statements That Don't Support Bonding or BankingRelationships

Here's where everything comestogether. Your financial statements aren't just a report card—they're thefoundation of your relationships with sureties and lenders. These institutionsunderstand construction accounting. They expect to see WIP schedules. They wantto see proper revenue recognition. They're looking at your backlog, yourover/underbillings, your equipment financing.

A general bookkeeper producesfinancial statements formatted for general businesses. They don't include theconstruction-specific schedules and reports that sureties andconstruction-focused lenders need. When your surety can't get comfortable withyour financials, your bonding capacity suffers. When your banker can'tunderstand your cash cycle, you'll struggle to get the line of credit you needto fund growth.

The real cost: Yourcapacity for growth is directly tied to the quality of your financialreporting. Poor construction accounting doesn't just mean messy books—it meansa cap on how big you can get.

The Bottom Line: Construction Accounting Is a Specialty

None of this is about generalbookkeepers being bad at their jobs. Most are excellent at what they do. Butconstruction accounting is a discipline unto itself—with its own revenuerecognition rules, its own billing processes, its own cost tracking requirements,and its own reporting standards.

Hiring a bookkeeper who doesn'tunderstand construction is like hiring an electrician to do your plumbing. Theymight be a skilled tradesperson. They're just skilled in the wrong trade.

The contractors whoconsistently make money in this industry aren't just good at building—they'regood at knowing their numbers. They know which jobs are profitable before finalbilling. They can forecast cash needs months out. They have the financial credibilityto secure bonding for larger projects.

That kind of financial clarityrequires someone who speaks construction. Someone who understands that thisbusiness has its own rules—and that following general accounting practices in aconstruction company is a recipe for financial blind spots that will eventuallycatch up with you.

Your books aren't just a compliance requirement.They're a management tool. Make sure the person managing them knows how tobuild what you need.