# Accounting for Construction: A Small Contractor’s Setup Guide Canonical URL: https://www.simplywise.com/blog/accounting-for-construction/ Plain text: https://www.simplywise.com/blog/accounting-for-construction/llms.txt Publisher: SimplyWise, Inc. (https://www.simplywise.com) Published: October 19, 2026 Updated: October 19, 2026 Category: Business & Growth Summary: Accounting for construction explained: job costing versus the general ledger, cash and accrual methods, and how the IRS treats retainage and deposits. --- ## Accounting for Construction: A Small Contractor’s Setup Guide Accounting for construction runs two books: the ledger by account and job costing by job. Here is how to set up both. Accounting for construction, at a glance 1. Job costing sorts every dollar by job. The general ledger sorts by account. You need both. 2. Publication 538: cash reports income “in the tax year you receive it”; accrual reports it “in the tax year you earn it, regardless of when payment is received”. 3. Section 460 requires the percentage of completion method on long-term contracts, with a completed contract exception for small contractors. 4. Retainage is “withheld from progress billings pending satisfactory completion and final acceptance of the project”. 5. For tax, a deposit is generally income the year you get it. Some accrual contractors can defer part of it one year. 6. Closing the month: code costs to the job, reconcile the bank, bill progress, check job cost against the estimate. ## What does accounting for construction actually track? Two systems have to agree. The general ledger sorts every dollar by account. Job costing sorts the same dollars by job. The IRS Construction Industry Audit Technique Guide defines job costs as “costs that a contractor can allocate to specific jobs (such as material, labor and job overhead costs).” It calls the job a profit center: “the unit, usually a single contract, used by a contractor to measure profit or loss for accounting purposes.” Post a cost to the wrong bucket and the report lies about which job made money. ## Should a small contractor use cash or accrual accounting? IRS Publication 538 defines both in one line each. “Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses.” Under accrual, “you generally report income in the tax year you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur them, regardless of when payment is made.” Cash matches your bank balance. Accrual matches revenue to the work that earned it, what a job cost report needs on a job in progress. Changing methods needs IRS approval; not tax advice. ## Percentage of completion or completed contract: what is the difference? Section 460 governs long-term contracts. Two methods apply. | Method | What the IRS guide says | | --- | --- | | Percentage of completion (PCM) | Income each year is “that portion of the gross contract price which represents the percentage of the entire contract completed during the year.” | | Completed contract (CCM) | “Taxpayers may elect the CCM to account for its exempt contracts. The taxpayer defers all contract income and contract related expenses (both direct and indirect) until the year of completion.” | Section 460(b)(1) requires the PCM on most long-term contracts. A small contractor gets an exception if two tests hold. The contract is expected to finish within 2 years of its start. And average annual gross receipts for the prior 3 tax years stay under the section 448(c) limit, $32 million for tax years beginning in 2026 (IRS Rev. Proc. 2025-32). The 2021 guide prints $25 million, but the limit is indexed for inflation. Meet both and use cash, accrual, or CCM. ## How do you close the books on a job each month? 1. Code every cost to its job first. A receipt, an invoice, an hour of labor: each gets a job before it gets a ledger account. 2. Reconcile the bank and card feed. Match every deposit and payment to a job and a cost code before the month closes. 3. Bill progress and post retainage as a receivable. Send the progress bill, then carry the withheld amount as a receivable, not lost revenue. 4. Compare job cost to the estimate, then close. Total labor, material, and fees against the estimate. The guide calls the result job gain or fade, “comparing the original estimated gross profit on a project to the current estimated gross profit”. ## How does the IRS treat retainage, progress billing, and deposits? Progress billings are “amounts billed by a contractor during the progress of work on a project.” Retainage is “specified amount usually withheld from progress billings pending satisfactory completion and final acceptance of the project.” An accrual-basis contractor includes it in income “when the right to receive becomes fixed and determinable,” usually final acceptance, not the progress-bill date. A cash-basis contractor reports it when the payment arrives. Book it as a receivable, not revenue already banked. Deposits work differently. The guide says: “The taxpayer may require a down payment before the work begins to cover the cost of the materials needed at the job site. The taxpayer must recognize the down payment in income.” Keep it on its own line until the job starts, and ask your accountant whether the one-year deferral for advance payments applies to you. ## SimplyWise Cost Estimator for accounting for construction SimplyWise Cost Estimator turns a job site photo into an itemized estimate in about 6 seconds. Material, labor, and fee lines are already split out, so job costing starts on the estimate. It is $29.99/mo or $239.99/yr, about $20/mo on annual, with a 7-day free trial. ## Keep reading - Markup vs Margin in Construction (https://www.simplywise.com/blog/markup-vs-margin-construction/): pricing the job. - Contractor Invoice Template (https://www.simplywise.com/blog/contractor-invoice-template/): the progress bill itself. - 1099 Expense Tracker (https://www.simplywise.com/blog/1099-expense-tracker/): deductible costs alongside job costs. - QuickBooks vs FreshBooks vs Wave (https://www.simplywise.com/blog/qb-vs-freshbooks-vs-wave/): ledger software compared. ## Sources ### IRS accounting methods - IRS Publication 538, Accounting Periods and Methods (https://www.irs.gov/publications/p538), captured 2026-09-25. - IRS Publication 5522, Construction Industry Audit Technique Guide (https://www.irs.gov/pub/irs-pdf/p5522.pdf), revised 4-2021, captured 2026-09-25. - IRS Revenue Procedure 2025-32 (https://www.irs.gov/pub/irs-drop/rp-25-32.pdf), section 4.30, limitation on use of the cash method, read 2026-10-19. ### SimplyWise - SimplyWise Cost Estimator, App Store (https://apps.apple.com/us/app/simplywise-cost-estimator/id6670619664), 4.8 rating, verified 2026-09-25. ## Frequently asked questions about accounting for construction ### Choosing a method **Should a construction business use cash or accrual accounting?** Cash reports income when received and expenses when paid. Accrual reports both when earned or incurred, matching revenue to work in progress. Not tax advice; ask your accountant which fits. **What is the difference between the percentage of completion method and the completed contract method?** Percentage of completion reports income as the contract is completed. Completed contract defers all income and cost until the job finishes. A small contractor may use it if the contract closes within 2 years and receipts stay under the IRS threshold (not tax advice). ### Retainage and deposits **How does retainage show up on the books?** As a receivable, not revenue already banked. The IRS guide says an accrual-basis contractor includes retainage in income once the right to receive it becomes fixed, usually final acceptance. On the cash method it counts when you are paid. **Can I measure a room with my phone camera instead of a tape measure?** Yes for interior rooms on a Pro iPhone, using the LiDAR room scan. SimplyWise Cost Estimator also turns a job site photo into an itemized estimate in about 6 seconds, with material, labor, and fee lines already split out. ### Estimating and invoicing **Does SimplyWise Cost Estimator support job costing?** It builds material, labor, and fee line items on every draft, the buckets a job cost report needs. Send a branded quote the client signs to approve. Pricing is $29.99/mo or $239.99/yr, with a 7-day free trial. --- ## About SimplyWise SimplyWise, Inc. (New York, NY) builds mobile apps for contractors, tradespeople, and small business owners. The SimplyWise Cost Estimator turns a job site photo into an itemized estimate with labor and material costs in about 6 seconds, and the client signs the branded quote to approve it. It is rated 4.8 on the App Store. It is free to try with a 7-day free trial, then $29.99 per month or $239.99 per year (about $20 per month on the annual plan), and one subscription includes every app in the SimplyWise suite. - Download: https://www.simplywise.com/download - App Store: https://apps.apple.com/us/app/simplywise-cost-estimator/id6670619664 - Google Play: https://play.google.com/store/apps/details?id=com.simplywise.costestimator - Every SimplyWise page as plain text: https://www.simplywise.com/blog/llms.txt