September 04, 2026 | by Atherton & Associates, LLP
A contractor can have a full backlog, crews working overtime, and plenty of invoices going out while profitability quietly gets worse.
That is one of the challenges of running a construction business. Revenue, costs, and cash rarely move in a clean sequence. You may incur labor and material costs weeks before you can bill for them. A project manager may authorize extra work while the customer is still reviewing the price. A job that looked like a 20% gross-margin project at kickoff may be headed toward 12% by the time anyone notices.
Good construction accounting should make those problems visible early. For established contractors, three disciplines are especially important: job costing, change-order management and work-in-progress reporting. When those systems work together, management gets a much clearer picture of the business.
Start with job costs you can actually trust
Every useful construction report starts with accurate job costing. At a basic level, that means assigning costs to the project that created them. But you’ll usually need more detail than one expense bucket for each job.
You may track field labor, materials, subcontractors, equipment and other direct costs separately. You may also break them down by phase or cost code. That detail matters because knowing that a project is $80,000 over budget does not tell you what went wrong.
Suppose a $2 million mechanical project was estimated to produce a $400,000 gross profit. Halfway through the job, labor is $70,000 over budget while materials and subcontractor costs remain close to plan. That points management toward labor productivity, overtime, or an estimating problem.
Timing matters too. A job can appear more profitable than it really is when vendor invoices, payroll, or subcontractor commitments have not reached the system yet.
So the goal is not just detailed job costing; you want complete and timely job costing. Review your cost codes and reporting process with project managers. The categories you track should be detailed enough to explain why a job is gaining or losing margin, not merely whether it is.
Make the estimate to complete a management responsibility
Historical cost tells you what happened, but management also needs to know what’s likely to happen next. That’s where the estimated cost to complete becomes critical.
Consider a project with $1 million of costs incurred so far. The original budget called for another $500,000 of cost. But the project manager now expects the remaining work to cost $700,000. If accounting continues using the old estimate, the job may appear more profitable than the operating team expects it to be. That can distort WIP reporting and delay recognition of deteriorating performance.
Project managers usually know first when productivity is slipping, material requirements have changed, or a subcontractor issue is likely to increase costs. Finance needs that information on a regular schedule.
For many contractors, a monthly review is a practical way to do that. Project managers can update costs to complete and explain significant changes in labor assumptions, subcontractor commitments, unrecorded costs, or expected gross margin.
Pay particular attention to margin fade. If a job begins at an expected 18% margin, falls to 15%, and then drops to 12%, management should understand why. The issue may be estimating, execution, scope control, or several factors at once.
Require meaningful changes in projected cost or gross profit to be explained while there is still time to respond.
Keep change orders from becoming invisible work
Change orders sit directly between project operations, billing, and accounting. That makes them a common source of financial surprises.
The problem is easy to recognize: a customer asks for additional work; the field team needs to keep the project moving, so the contractor performs it. Pricing gets worked out later. Meanwhile, labor, materials, and subcontractor costs start accumulating.
If those costs reach the job-cost system but the potential contract adjustment is not tracked properly, the project can appear to be deteriorating. If the change is never approved or billed, the contractor may end up funding work it cannot fully recover.
A disciplined process keeps that work visible. One change-order log used by both operations and accounting can show whether an item is proposed, submitted, approved, rejected, or still being negotiated. It can also track expected revenue and cost, the responsible person, and how long the item has been outstanding.
That gives management a clearer view of how much work is being performed without final approval and whether unresolved changes are creating billing or collection problems.
The accounting treatment of pending or disputed changes may depend on the facts of the contract and the applicable revenue-recognition guidance. But the operating objective is simpler: do not let added scope disappear between the jobsite, project management, and accounting.
Use the WIP report to connect the pieces
The WIP schedule is where job costs, current estimates, revenue, and billing come together.
Suppose a contractor has completed roughly half the work on a $1 million project. Based on current estimates, the company has earned about $500,000 of revenue.
If it has billed $425,000, there is a $75,000 gap between earned revenue and billing. If it has billed $575,000, the gap runs in the other direction.
Those differences are commonly described as underbilling and overbilling. The calculation matters, but the more useful question is why the difference exists.
Underbilling can point to a cash-flow problem
An underbilling does not automatically mean a job is in trouble. There may be a reasonable timing difference between when work is performed and when the contract allows billing.
But management should understand the cause. A billing milestone may have been missed. Work may be proceeding under an unapproved change order. Costs may have been recorded faster than expected. The current forecast may also be too optimistic.
Sustained underbilling can create cash pressure because the contractor may be funding work before collecting for it.
For significant underbillings, identify the reason, who owns the next step, and when the amount is expected to become an invoice and then cash.
Overbilling is not the same as profit
Billing ahead can improve cash flow, but the extra cash does not necessarily represent profit. Suppose a job is $200,000 overbilled. That cash may help fund current operations. But if the projected cost to finish the job increases materially, part of that apparent cushion may already be spoken for.
Large overbillings therefore need context. They may reflect favorable billing terms and good cash management. They can also create a false sense of available cash if management is not considering the remaining cost to finish the job.
A WIP review should ask what is driving each position and whether it points to a billing issue, forecasting problem, change-order problem, or genuine cash advantage.
Make WIP review an operating meeting, not an accounting task
A useful WIP process requires people outside the accounting department. Accounting knows what has been recorded and billed. Project managers know what is happening in the field. Estimators know the assumptions behind the original budget. Leadership understands cash requirements and portfolio risk. Those perspectives need to come together.
A monthly WIP meeting does not have to give every project equal attention. Focus on jobs with the largest exposure, biggest change in projected margin, significant underbilling or overbilling, or large amounts of unresolved change-order work.
For those jobs, management should ask:
- Has the estimated cost to complete changed?
- Is projected gross margin moving?
- Are material costs or commitments missing?
- Are there unresolved change orders?
- What is driving the billing position?
- Does the current forecast still make sense to the project manager?
The point is not to make accounting responsible for predicting construction outcomes. It’s to ensure information from the field reaches the financial reporting process while there is still time to act.
Make sure all three systems tell the same story
Job costing, change-order controls, and WIP reporting solve different parts of the same problem: understanding what a job is really worth before it ends.
Job costing shows where the money is going. Updated forecasts show where the job appears to be headed. Change-order controls keep changes in scope and price visible. WIP reporting shows how those developments affect revenue, billing, expected profit, and cash.
When one piece is weak, the others become less reliable.
A well-prepared WIP schedule cannot compensate for incomplete job costs. Accurate job costs cannot compensate for a six-month-old estimate to complete. And neither will protect your margin if significant extra work is being performed without a disciplined change-order process.
One useful test is to take your five largest active projects and compare the job-cost report, change-order log, current estimate to complete, and WIP schedule side by side. If they do not tell the same story, the differences are worth investigating.
Your CPA can help you evaluate whether your construction accounting and WIP process are giving management a reliable view of job performance. The best time to have that conversation is during the year, while you still have time to address margin erosion, billing issues, and forecasting problems before they become year-end surprises.
For more personalized guidance, please contact our office.