Setting Up a Contractor's Books: The Chart of Accounts, Job Costing From Day One, and the Cash-or-Accrual Decision

A contractor's books have to answer a question a retailer's don't: which job made money, and by how much. Everything about construction bookkeeping follows from that requirement, and a set of books that can't answer it is a set of books that only exists for the tax return. The chart of accounts: the generic software default — income, cost of goods sold, expenses — is inadequate; the construction chart separates revenue by type (contract revenue, change orders, service and time-and-materials work), direct job costs by category (labor, materials, subcontractors, equipment, other direct costs, and — in the percentage-of-completion world — indirect job costs allocated), indirect costs (job supervision, small tools, vehicles, insurance allocated to jobs), and general overhead (office, marketing, owner's compensation not allocated); the balance sheet carries the construction-specific accounts — contract receivables, retainage receivable (the held-back percentage the owner or general contractor releases at completion), costs and estimated earnings in excess of billings (underbillings, an asset), billings in excess of costs and estimated earnings (overbillings, a liability), retainage payable to subcontractors, and customer deposits (a liability, not revenue — the most common booking error in residential work). Job costing: every direct cost is coded to a job and a cost type at entry — the material invoice to the job it was bought for, the payroll hours to the job worked, the subcontractor's bill to the job and phase — so that the job cost report shows each job's costs against its contract price and its estimate; the coding discipline is the entire value of the system, and a contractor whose bookkeeper codes costs to "materials" without a job has a general ledger, not a job cost system; the job cost report, produced monthly, shows estimated versus actual by cost type and the projected margin at completion — the report that changes how a contractor bids the next job. The method decision, in two layers. Tax: contractors below the gross-receipts threshold (an average-annual-gross-receipts test indexed to US$32 million for 2026, up from US$31 million in 2025) may use the cash method for tax (income when collected, expenses when paid — the simplest, and the most tax-favorable for a growing contractor whose receivables exceed payables at year-end), the completed-contract method for long-term contracts (income and costs deferred until each contract is complete — favorable where contracts span year-ends), or the percentage-of-completion method (income recognized as costs are incurred against total estimated costs — required for larger contractors and for certain contracts, and the method that matches the financial statements); the choice is an accounting-method election with change procedures, made with the tax preparer, and small contractors overwhelmingly choose cash or completed-contract for tax. Financial reporting: bonding agents and lenders want to see percentage-of-completion statements — the work-in-progress schedule showing each open contract's estimated total, costs to date, percent complete, revenue earned, billings, and the over- or under-billing — because that schedule is how they read a contractor's health; so a contractor who bonds maintains percentage-of-completion books for the statements and may elect a different method for tax, with the reconciliation between the two as an annual computation. The avoid-the-shoebox list, stated as practices: one business bank account and one business credit card, with no personal spending on either (the commingling that turns bookkeeping into forensic work); every material purchase coded to a job at the register (the receipt with the job name written on it, or the supplier account set up by job); payroll hours captured by job through time tracking; subcontractor invoices matched to the job and the W-9 on file before payment (the 1099 guide); customer deposits booked as liabilities and moved to revenue when earned; retainage tracked separately from receivables; change orders documented and billed rather than absorbed; and the monthly close — reconciled accounts, the job cost report, the work-in-progress schedule — done every month, not at year-end. The software question: construction-specific packages and the construction modules of general small-business software both support job costing; the choice matters less than the discipline of coding, and a contractor who codes consistently in basic software outperforms one with a construction package and no coding habit. What good books produce: a job cost report that says which jobs made money and why; a work-in-progress schedule the bonding agent trusts; a year-end package the tax preparer can use without rework (the construction-accountant cost guide covers what that saves); and estimated tax computations built from real margins rather than the bank balance (the contractor estimated-tax guide). The retrofit cost: a contractor who runs two years without job costing and then wants it faces a reconstruction — invoices re-coded from memory, payroll re-allocated from timesheets that may not exist — priced by the hour and rarely complete; the system set up at the first invoice costs almost nothing extra.

Key takeaways

• The construction chart of accounts separates revenue by type, direct job costs by category, indirect job costs, and overhead — and carries the construction balance sheet accounts: retainage receivable and payable, over- and under-billings, and customer deposits as liabilities.
• Job costing is a coding discipline: every direct cost to a job and a cost type at entry — materials at the register, payroll hours by job, subcontractor bills by job and phase — producing a monthly estimated-versus-actual report.
• Two method layers: tax (cash or completed-contract for most small contractors, percentage-of-completion for larger ones — an election made with the preparer) and financial reporting (percentage-of-completion with a work-in-progress schedule for bonding and lending), reconciled annually.
• Deposits are liabilities, retainage is tracked separately, change orders are billed — the three booking errors that misstate a contractor's revenue.
• The monthly close is non-negotiable: reconciled accounts, the job cost report, and the work-in-progress schedule every month.
• Set it up at the first invoice: the retrofit is a reconstruction priced by the hour and rarely complete.

The contractor's first-month bookkeeping setup

Business bank and card, no personal spending. Chart of accounts built for construction (revenue types, cost categories, the construction balance sheet accounts). Job list created before the first cost is booked. Supplier accounts and time tracking set to capture the job. Subcontractor W-9s collected before first payment. Deposit and retainage accounts configured. Method decision made with the tax preparer (and the surety, if bonding is contemplated). The monthly close scheduled. A day of setup that decides whether the books answer the only question that matters.

Worked example

Two remodelers start the same spring. Remodeler one: sets up the construction chart, codes every Home Depot receipt to a job at the register, runs payroll through time tracking by job, books customer deposits as liabilities, and closes monthly. By October the job cost report shows kitchen remodels at 31% gross margin and bathroom remodels at 12% — the bathrooms were being bid off the kitchen template with tile costs badly underestimated; she reprices bathrooms, and the fourth-quarter jobs land at 24%. Her year-end package goes to the preparer as a reconciled ledger with a work-in-progress schedule; the cash method for tax is elected with a clear picture of what it defers. Remodeler two: uses the software's default chart, codes everything to "materials" and "labor," books deposits as revenue when received, and reconciles at year-end. His preparer spends hours untangling deposits from revenue, cannot tell him which jobs made money, and has to reconstruct the method computation; his estimated taxes were paid on the bank balance and were wrong in both directions across the year. In year two he asks for job costing and is quoted a reconstruction of year one that costs more than the monthly bookkeeping would have — and is still incomplete, because half the receipts don't say which job they were for.

Official sources

The IRS publishes tax guidance for industries and professions — including construction businesses — through its industries and professions tax centers, covering accounting methods, employment taxes, and worker classification. — Internal Revenue Service, Industries, professions and business tax centers, https://www.irs.gov/businesses/small-businesses-self-employed/industries-professions-and-business-tax-centers

Publication 583 explains how a new business chooses its tax year and accounting method, obtains an employer identification number, keeps records, and treats business start-up and organizational costs, which may be partly deducted in the first year and the balance amortized. — Internal Revenue Service, Publication 583, Starting a Business and Keeping Records, https://www.irs.gov/publications/p583

Practitioner note

Construction books exist to answer which job made money, and the ones that can't are just tax-return inputs. Our contractor setups are built at the first invoice — the construction chart, job coding at the register and the timesheet, deposits as liabilities, retainage separated — and closed monthly with the job cost report and the work-in-progress schedule, because the retrofit is a reconstruction we price by the hour and rarely finish, and the method decision is made with the preparer and the surety in the same conversation.

See also: For related guidance, see starting a construction business: the year-one setup list; and browse every small business tax guide, by situation.

Next step

Fairlight handles construction bookkeeping with job costing and work-in-progress schedules, the chart of accounts and monthly close built for contractors, and the accounting-method decision coordinated with your return and your bonding. See pricing or book a call.