Construction accounting is normal accounting with four extra problems bolted on. Jobs that run across year ends. Money earned before it is invoiced. Money invoiced that somebody holds back. And tax taken off at source before it reaches you.
Get those four right and the rest follows. Get them wrong and your accounts will look fine while the business quietly struggles.
Why the normal method breaks
In most businesses you sell something, raise an invoice, and that is the sale. Income and the work that earned it land in the same month.
In construction they do not. You might spend four months on a job, apply for payment monthly, get certified for less than you applied for, and see the last 5% eighteen months after you finished. Meanwhile the costs went out weeks before any of it.
If you just book what you invoiced against what you spent, every month is wrong. Some months look brilliant, some look terrible, and neither reflects what happened.
Recognising revenue on long jobs
The principle is that you recognise revenue as you do the work, not as you invoice it.
On a job running past a year end that means measuring how far through you are and taking that share of the contract value into the accounts. Costs to date against total expected costs is the usual measure, and it works as long as your cost forecast is honest.
The failure is optimism. A job that is 60% through its budget but 40% through its work is losing money, and a cost based percentage will not show it unless somebody updates the forecast. That is a conversation with the site, not a bookkeeping exercise.
Where a loss is expected, you take the whole loss now. You do not spread it. That rule catches people out and it is the right one, because a job that is going to lose £40,000 is already worth £40,000 less today.
Work in progress
Work you have done and not yet invoiced is an asset and it belongs on the balance sheet.
Leave it out and your accounts understate the business, which matters most when a lender, a surety or a prospective buyer is reading them. Put it in without evidence and you are overstating. The answer is valuing it off the same measure you used for revenue, and being able to show the working.
Retentions
Retention is money you have earned that the customer holds, usually 3% to 5%, released in two halves. Half at practical completion, half at the end of the defects period.
Treat it as a debtor, not as a discount. Track it by job and by release date, because nobody sends it to you automatically. A firm turning over £2 million can easily have £60,000 or more sitting in retentions it has never chased.
Applications, certificates and invoices
Three different documents that a general accountant tends to treat as one.
You apply for payment. The customer certifies an amount, which may be less. You then invoice the certified amount. The VAT tax point follows the invoice, not the application.
Booking applications as sales overstates your turnover and your VAT. Booking nothing until cash arrives understates the business. The correct treatment sits between the two, and it is one of the clearest signs of whether an accountant has done construction before.
CIS and VAT run through everything
Two things that touch nearly every transaction.
CIS takes 20% off your labour before it reaches you, and requires you to take 20% off your subcontractors and file monthly. It has to be reconciled against what HMRC actually holds, not just what your books say.
The VAT reverse charge means most invoices between VAT registered construction businesses carry no VAT at all. That changed the shape of construction cash flow permanently in 2021 and a lot of firms never adjusted to it.
Job costing, which is the point of all of it
Everything above is about getting the accounts right. Job costing is about getting decisions right.
Labour, materials, plant and variations allocated to each job, overheads apportioned rather than ignored, and a number per job while the job is still live. Without it you find out a job lost money in the annual accounts, by which point you have quoted three more the same way.
More on this in job level profitability.
Which method suits which business
A sole trader subcontractor on short jobs does not need percentage completion. Cash in, cash out, CIS reclaimed properly, and a tax return that does not overpay.
A limited company running jobs over several months needs the full treatment. Revenue recognised as earned, work in progress on the balance sheet, retentions tracked, and monthly job level numbers.
The mistake is applying the simple method to a business that outgrew it two years ago, which happens quietly and usually shows up as a tax bill nobody expected.
If your accounts do not look like this
Construction is the only sector we work in, so this is what we do every day rather than once a year.
Have a look at what we do or book a call and we will tell you what your current accounts are missing.