Construction Accounting Terms Explained

Invoicing a client for work completed to date on a construction project, rather than billing the full contract amount upfront or at completion. Progress billing aligns cash inflows with project milestones, preventing contractors from financing entire projects out of pocket.

Progress billing typically follows a schedule of values agreed upon at contract signing. Each billing cycle, the contractor submits an application for payment showing percentage of completion by line item. Disputes over completion percentages are a common source of payment delays.

A percentage of each progress payment (typically 5-10%) withheld by the project owner until the project is substantially complete. Retainage protects owners against defective work or contractor abandonment, but it creates a significant cash flow burden for contractors who have already spent the money on labor and materials.

Retainage can represent a massive amount of tied-up capital across multiple projects. A contractor with $5M in active projects at 10% retainage has $500K locked up that cannot be used for operations. Retainage release timelines vary by state law and contract terms.

Tracking all costs — labor, materials, equipment, subcontractors — to specific jobs or projects rather than lumping them into general expenses. Job costing is the foundation of construction accounting because every project is different and profitability must be measured at the individual job level.

Without accurate job costing, a construction company can be profitable overall while losing money on specific projects. The profitable jobs subsidize the losers, and you never learn which types of work, crew configurations, or client relationships actually make money.

The accounting for costs incurred and revenue earned on projects that are currently underway but not yet complete. WIP reporting compares estimated project costs to actual costs to determine whether projects are overbilled (billed more than earned) or underbilled (earned more than billed).

A WIP schedule is one of the most important financial reports in construction. Being overbilled means you have collected cash you have not yet earned — which feels good but can mask future cash flow problems. Being underbilled means you have done work you have not been paid for yet.

Formal modifications to the original contract that adjust scope, price, or timeline. Change orders are how construction projects evolve after the contract is signed — and how contractors either protect their margins or give away profit through uncompensated extra work.

Unapproved change orders are a major risk. Work performed without a signed change order may never be paid, and disputed change orders are a leading cause of construction litigation. Document every deviation from the original scope, no matter how small.

The total dollar value of work under contract that has not yet been completed. Backlog represents future revenue and is a key indicator of a construction company's near-term financial health. A growing backlog means the pipeline is strong; a shrinking backlog signals potential revenue gaps ahead.

Backlog quality matters as much as backlog quantity. $10M in backlog from reliable repeat clients on well-scoped projects is very different from $10M in backlog from new clients on projects with tight margins and aggressive timelines.

The maximum total value of projects a construction company can bond at any given time, determined by the surety company based on financial health, experience, and track record. Bonding capacity is effectively the ceiling on the size and volume of projects you can pursue.

Surety companies evaluate your working capital, equity, and project history when setting bonding limits. Improving your financial metrics — especially working capital and profitability — directly expands the projects you can bid on and win.

The process of distributing indirect costs — office rent, insurance, equipment depreciation, administrative salaries — across individual jobs. Proper overhead allocation ensures job cost reports reflect the true cost of completing each project, not just the direct costs.

The most common construction overhead allocation methods are based on labor hours, labor cost, or contract value. Each method produces different results, so choosing the right one for your business type matters. Misallocated overhead can make unprofitable jobs look profitable.

The movement of money in and out of your construction business over time. Construction cash flow is uniquely challenging because of long project timelines, retainage, slow-paying clients, and the need to purchase materials and pay crews before receiving payment.

More construction companies fail from cash flow problems than from a lack of work. You can have a full backlog and strong margins and still go under if the timing of cash in and cash out is not managed aggressively. Weekly cash flow forecasting is essential.

Money you owe to suppliers, subcontractors, and vendors for materials and services already received. In construction, managing AP timing is a critical cash flow lever — paying too early drains cash, paying too late damages supplier relationships and can trigger mechanic's liens.

Construction AP has legal implications that other industries do not face. Subcontractors and suppliers have lien rights, meaning they can place a legal claim on the property if not paid. Managing AP is not just a financial exercise — it is a legal risk management practice.