Construction Accounting: Job Costing, Progress Billing, and Retention
Small Business · 2026-01-18 · 7 min
Construction accounting has unique requirements: job costing, progress billing, retention, and change orders. Standard accounting practices do not cover these. Here is what does.
Construction accounting differs from standard accounting in one fundamental way: revenue and costs must be tracked per job, not just per period. A general contractor running five projects simultaneously needs to know the profitability of each one independently. Job costing allocates every expense — materials, labor, equipment, subcontractors — to a specific project.
Progress billing (also called application for payment) invoices the client based on work completed, not time elapsed. A contractor does not bill $10,000 per month — they bill for the percentage of work completed during that period. This requires detailed tracking of project milestones and their completion status.
Retention (or retainage) is the portion of each payment that the client withholds until project completion — typically 5-10%. On a $500,000 project, $25,000-$50,000 is held back. This creates a receivable that is real but not collectible until the project closes. Your cash flow forecast must account for retention separately from regular receivables.
Change orders are the wild card. When the scope of work changes mid-project, the cost and revenue must be tracked separately from the original contract. A change order that adds $20,000 to a project is not simply more revenue — it has its own costs, margin, and billing schedule. Accounting for change orders separately prevents them from distorting the original project profitability analysis.
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