Construction accounting has its own vocabulary, and getting it wrong costs real money — on bids, on taxes, and with your bonding company. Here are the terms that matter most, defined the way we explain them to clients.
Revenue Recognition & Contract Accounting
- Percentage-of-Completion Method (PCM)
- A method that recognizes revenue and profit as a job progresses rather than at the end, usually measured by the cost-to-cost approach. It is required for many long-term contracts and gives the most accurate period-by-period picture of profitability.Related: Cost-to-Cost Method, Completed-Contract Method (CCM), IRC §460 (Long-Term Contracts)Learn more
- Completed-Contract Method (CCM)
- A method that defers all revenue and cost until a job is substantially complete. It is available mainly to smaller contractors and certain short-term or home-construction contracts, and it can defer taxable income — but it hides in-progress profitability.Related: Percentage-of-Completion Method (PCM), Small Contractor Exemption
- Cost-to-Cost Method
- The most common way to measure completion under PCM: costs incurred to date divided by total estimated costs equals percent complete. Its accuracy depends entirely on a reliable estimate of total cost.Related: Percentage-of-Completion Method (PCM), Estimated Cost to Complete (ETC)
- Work-in-Progress (WIP) Schedule
- A report reconciling each open job's contract value, costs to date, billings, and estimated cost to complete. It is the single most important construction financial report — it reveals over/under-billings and profit fade before they become cash problems.Related: Over-Billing (Billings in Excess of Costs), Under-Billing (Costs in Excess of Billings), Profit FadeLearn more
- Over-Billing (Billings in Excess of Costs)
- When you have billed a customer more than you have earned to date on a job. It appears as a liability on the balance sheet. It helps cash flow, but large over-billings can mask a job that is actually behind.Related: Under-Billing (Costs in Excess of Billings), Work-in-Progress (WIP) Schedule
- Under-Billing (Costs in Excess of Billings)
- When you have earned more than you have billed on a job. It appears as an asset, but it is often a warning sign of slow billing or unrecorded cost overruns that are quietly draining cash.Related: Over-Billing (Billings in Excess of Costs), Work-in-Progress (WIP) Schedule
- Retainage (Retention)
- A portion of each progress payment (commonly 5–10%) withheld by the customer until the project is complete. It is tracked separately as retainage receivable — and as retainage payable for the amounts you withhold from your own subcontractors.Related: Accounts Receivable (AR), Accounts Payable (AP)
- Change Order
- A documented modification to a contract's scope, price, or schedule. Unapproved or poorly tracked change orders are one of the most common sources of margin erosion and payment disputes in construction.Related: Contract Backlog, Profit Fade
- Contract Backlog
- The total value of signed work not yet completed. It is a key forward-looking indicator that lenders and sureties watch to judge whether a contractor has enough work to stay healthy.Related: Bonding Capacity, Working Capital
- ASC 606
- The U.S. accounting standard for revenue recognition ("Revenue from Contracts with Customers"). It frames construction revenue around performance obligations satisfied over time, and shapes how percentage-of-completion is applied under GAAP.Related: Percentage-of-Completion Method (PCM)
- Estimated Cost to Complete (ETC)
- The projected remaining cost to finish a job. It drives the percent-complete calculation and profit projections, so a bad ETC estimate distorts revenue, profit, and the entire WIP schedule.Related: Cost-to-Cost Method, Profit Fade
- Profit Fade
- A decline in a job's expected gross profit from one reporting period to the next, usually revealed on the WIP schedule. It is a red flag for estimating errors, scope creep, or field-execution problems.Related: Work-in-Progress (WIP) Schedule, Estimated Cost to Complete (ETC)
Job Costing
- Job Costing
- Assigning every cost — labor, materials, subcontractors, equipment, and allocated overhead — to the specific project it belongs to, so each job has its own profit-and-loss statement. It is the foundation of knowing which work actually makes money.Related: Cost Codes, Direct Costs, Gross Profit (Gross Margin)Learn more
- Cost Codes
- A standardized numbering system (often based on the CSI MasterFormat) for categorizing costs by type and phase across all jobs. Consistent cost codes make estimating, comparison, and historical analysis possible.Related: Job Costing
- Direct Costs
- Costs traceable to a specific job: field labor, materials, subcontractors, equipment, and job-specific permits or bonds. They are the core of every job's cost of construction.Related: Indirect Costs, Cost of Goods Sold (Cost of Construction)
- Indirect Costs
- Costs that support jobs but can't be traced to just one — supervision, small tools, and vehicle costs, for example. They are usually allocated across jobs so each project's profitability reflects its true cost.Related: Direct Costs, Overhead Allocation
- Labor Burden
- The true cost of an hour of labor beyond the base wage: payroll taxes, workers' compensation, insurance, and benefits. Bidding off the raw wage instead of the burdened rate is a leading cause of underbidding.Related: Direct Costs, Overhead Allocation
- Overhead Allocation
- The method of spreading general, administrative, and indirect costs across jobs so each job's profitability reflects its real, fully loaded cost — not just its direct costs.Related: Indirect Costs, Labor Burden
- Committed Costs
- Costs you have contractually obligated — through purchase orders and subcontracts — but not yet paid or even received an invoice for. Tracking them prevents surprise overruns and keeps job cost projections honest.Related: Estimated Cost to Complete (ETC)
- Gross Profit (Gross Margin)
- Revenue minus direct job costs (cost of construction). It is the margin left to cover overhead and profit, and it is watched both per job and company-wide as a core health metric.Related: Cost of Goods Sold (Cost of Construction), Break-Even Point
- Cost of Goods Sold (Cost of Construction)
- For contractors, the direct cost of completing work — labor, materials, subcontractors, and equipment. It is often called cost of construction or cost of revenue, and it is subtracted from revenue to get gross profit.Related: Direct Costs, Gross Profit (Gross Margin)
Financial Statements & Cash Flow
- Working Capital
- Current assets minus current liabilities — the cash cushion that funds day-to-day operations. Sureties treat it as a primary driver of how much bonded work they will back.Related: Current Ratio, Bonding Capacity
- Current Ratio
- Current assets divided by current liabilities — a liquidity measure lenders and sureties use to gauge short-term financial health. A ratio comfortably above 1.0 signals you can cover near-term obligations.Related: Working Capital
- Cash Flow Forecast
- A forward projection of cash coming in and going out, by week or month. It is essential in construction because billing and payment cycles lag well behind the costs you incur to do the work.Related: Days Sales Outstanding (DSO), Working Capital
- Days Sales Outstanding (DSO)
- The average number of days it takes to collect receivables after billing. High DSO signals slow collections that strain cash — a chronic risk in construction because of retainage and long payment cycles.Related: Accounts Receivable (AR), Cash Flow Forecast
- Accounts Receivable (AR)
- Money owed to you by customers for completed or billed work, including retainage receivable. Managing AR closely is critical because unbilled or slow-paying work ties up the cash your operation runs on.Related: Accounts Payable (AP), Days Sales Outstanding (DSO)
- Accounts Payable (AP)
- Money you owe to suppliers and subcontractors, including retainage payable. Timing AP against your incoming cash is a core part of construction cash-flow management.Related: Accounts Receivable (AR), Cash Flow Forecast
- Break-Even Point
- The revenue level at which total costs are covered and profit is zero. Knowing it tells you exactly how much work you must book to keep the doors open before you earn a dollar of profit.Related: Gross Profit (Gross Margin), Overhead Allocation
- General Conditions
- Project-level indirect costs — site supervision, temporary facilities, dumpsters, utilities, and the like — that aren't tied to a single trade but clearly belong to a specific job. They are typically billed as their own line on the schedule of values.Related: Indirect Costs, Schedule of Values (SOV)
Bonding, Billing & Compliance
- Surety Bond
- A three-party guarantee among the contractor, the project owner, and a surety that the contractor will perform as promised. The common types are bid bonds, performance bonds, and payment bonds.Related: Bonding Capacity, AIA Billing (G702 / G703)
- Bonding Capacity
- The maximum amount of bonded work a surety will back — both per job and in aggregate. It is driven largely by working capital, equity, and clean, timely financial statements, which is why good accounting directly expands the work you can win.Related: Working Capital, Surety BondLearn more
- AIA Billing (G702 / G703)
- The standard AIA G702 and G703 progress-billing forms used to request payment based on percent complete against a schedule of values. Most commercial and public owners require billing in this format.Related: Schedule of Values (SOV), Surety Bond
- Schedule of Values (SOV)
- A breakdown of the total contract price into individual line items, used to bill and track progress on AIA-style payment applications. A well-built SOV supports healthy billing timing and clear percent-complete reporting.Related: AIA Billing (G702 / G703), General Conditions
- Prevailing Wage (Davis-Bacon)
- Legally mandated minimum wages and fringe benefits for trades on public-works projects — set federally under the Davis-Bacon Act and by many states. Working prevailing-wage jobs triggers certified payroll requirements.Related: Certified Payroll
- Certified Payroll
- Weekly payroll reports that certify compliance with prevailing-wage rules on public projects. They must show each worker's hours, classification, and pay, and errors carry real financial and legal penalties.Related: Prevailing Wage (Davis-Bacon)Learn more
- Mechanic's Lien
- A legal claim against a property for unpaid construction work or materials. It gives contractors, subcontractors, and suppliers security for payment, but filing rights are governed by strict state deadlines.Related: Lien Waiver
- Lien Waiver
- A document by which a contractor or supplier waives lien rights, typically exchanged for payment. Waivers come in conditional and unconditional, partial and final forms — and signing the wrong one can forfeit rights before payment clears.Related: Mechanic's Lien
Construction Tax
- IRC §460 (Long-Term Contracts)
- The tax rules governing long-term contracts, which generally require larger contractors to use the percentage-of-completion method for tax, with important exceptions for smaller contractors and certain contract types.Related: Small Contractor Exemption, Look-Back Method, Percentage-of-Completion Method (PCM)Learn more
- Small Contractor Exemption
- A tax exception, based on an average gross-receipts threshold that is indexed annually, that lets smaller contractors avoid the §460 percentage-of-completion requirement and use methods such as completed-contract. Confirm the current-year threshold before relying on it.Related: IRC §460 (Long-Term Contracts), Completed-Contract Method (CCM)Learn more
- Look-Back Method
- A §460 true-up that recalculates interest on tax that was over- or under-paid because early percentage-of-completion estimates differed from the final results of a long-term contract.Related: IRC §460 (Long-Term Contracts), Percentage-of-Completion Method (PCM)
- Cost Segregation
- An engineering-based study that reclassifies parts of a building into shorter depreciable lives, accelerating depreciation deductions into the early years of ownership. Common for real estate investors and owner-occupied facilities.Related: Bonus Depreciation, Section 179 DeductionLearn more
- Reasonable Compensation
- The IRS requirement that an S-corporation owner-employee pay themselves a defensible, market-rate salary before taking distributions. Setting it too low to save payroll tax invites reclassification, back taxes, and penalties.Related: Section 179 DeductionLearn more
- Section 179 Deduction
- A provision allowing a business to immediately expense qualifying equipment and certain property, up to an annual limit that is indexed and subject to phase-outs. Useful for equipment-heavy contractors — confirm current-year limits.Related: Bonus Depreciation, Cost Segregation
- Bonus Depreciation
- An additional first-year depreciation allowance on qualifying assets. The applicable percentage has been changing under current law, so always confirm the current-year rate before planning around it.Related: Section 179 Deduction, Cost Segregation