Construction is one of the few industries where a business can post record gross billings, keep job sites bustling with hundreds of subcontractors, and yet suddenly find itself in insolvency. Why does this happen? Because traditional off-the-shelf small business accounting software records revenue based on invoices sent out rather than earned economic value.
When a contractor receives a 20% advance mobilization deposit on a $2,000,000 commercial fit-out, standard cash accounting reports $400,000 in immediate income. In reality, that money is not profit—it is a working liability borrowed against future materials, payroll, and equipment commitments.
In this guide, we dive deep into the ASC 606 Percentage-of-Completion (PoC) accounting standard, break down the exact mathematics of fully burdened labor rates, and construct a complete Work-in-Progress (WIP) Schedule to eliminate profit fade.
- 1. Direct Job Costs vs. Indirect Overhead Allocation
- 2. The True Math of Fully Burdened Labor Rates
- 3. The Work-in-Progress (WIP) Schedule: Reconciling Under & Overbillings
- 4. Percentage-of-Completion (PoC) Calculation Models
- 5. Numerical Walkthrough: 3 Ongoing Commercial Projects
- 6. Construction Accounting FAQ
1. Direct Job Costs vs. Indirect Overhead Allocation
Accurate contractor P&L statements hinge upon strict segregation of expenses into three distinct buckets:
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Direct Job Costs (COGS): Expenses that exist solely because of a specific project:
- Job-site direct trade labor (framers, electricians, plumbers).
- Direct materials and delivery freight (drywall, conduit, steel trusses).
- Tier-1 and Tier-2 subcontractor contracts.
- Direct equipment rentals (scissor lifts, cranes, site dumpsters).
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Indirect Construction Costs: Costs tied directly to field operations but shared across multiple active projects:
- Field superintendent salaries and truck allowances.
- Small tool replenishment and safety equipment (harnesses, hard hats).
- Commercial general liability (CGL) project insurance.
-
General & Administrative (G&A) Overhead: Fixed costs of keeping the corporate entity open regardless of project volume:
- Corporate office lease, accounting, legal, and estimating salaries.
- Surety bonding annual fees and software licenses.
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2. The True Math of Fully Burdened Labor Rates
Billing an employee at $35/hour when their base hourly wage is $35/hour guarantees rapid financial failure. A worker paid $35/hour in direct wages actually costs the employer between $49.00 and $58.00 per billable hour once taxes, insurances, and non-working hours are loaded.
3. The Work-in-Progress (WIP) Schedule: Reconciling Under & Overbillings
The WIP schedule is the master control document of construction accounting. It connects job costing to the general ledger and ensures that your Income Statement reflects true progress rather than billing timing.
The critical concept is Earned Revenue:
5. Numerical Walkthrough: 3 Ongoing Commercial Projects
Examine how a general contractor managing three commercial tenant fit-outs reconciles revenue at month-end:
| Job Name | Contract Value | Est. Total Cost | Actual Cost to Date | % Complete | Earned Revenue | Total Billed | WIP Adjustment |
|---|---|---|---|---|---|---|---|
| Project A (Medical Clinic) | $850,000 | $680,000 | $340,000 | 50.0% | $425,000 | $500,000 | $75,000 Overbilled (Liability) |
| Project B (Retail Boutique) | $420,000 | $315,000 | $210,000 | 66.7% | $280,000 | $220,000 | $60,000 Underbilled (Asset) |
| Project C (Office Fit-Out) | $1,200,000 | $960,000 | $192,000 | 20.0% | $240,000 | $240,000 | $0 (Balanced) |
| Totals | $2,470,000 | $1,955,000 | $742,000 | - | $945,000 | $960,000 | Net $15,000 Overbilled |
Accounting Insight: If the contractor had simply posted the $960,000 in customer billings to the P&L, revenue would have been overstated by $15,000. In Project A, the contractor is $75,000 ahead on billing—that $75,000 represents client funds held to complete future drywall, electrical, and MEP trades.
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6. Construction Accounting FAQ
What is retention (retainage) and how should it be booked?
Retainage is typically 5% to 10% of gross progress billings withheld by the project owner or general contractor until final substantial completion and punch-list sign-off. Retainage receivable should be tracked in a distinct asset sub-account separate from standard accounts receivable (A/R) because it cannot be collected within ordinary 30-day payment terms.
How often should a construction WIP schedule be updated?
For commercial contractors with active projects exceeding $250,000, WIP schedules must be updated monthly during month-end closing. Waiting for quarterly or annual reviews allows undetected cost overruns to deplete profit margins before corrective field actions can be taken.