Margins in construction are tight. Recent industry analysis puts average construction profit margins at around 6%, with many contractors living in the 2–3% range if they’re not watching costs and changing orders closely. At the same time, nearly 20% of construction companies fail in the first year and about 65% shut down within 10 years, often because of cash flow problems and poor financial management rather than lack of work.

This guide is for contractors who want to stay on the right side of those numbers in 2025–2026 – using practical, construction-specific bookkeeping, not generic small business advice.

1. Why Bookkeeping Matters More in Construction Than in Most Trades

Construction isn’t like a retail shop or a small office service business. Your projects:

  • Run for weeks or months
  • Require large upfront outlays
  • Depend on progress billing and retainage
  • Are vulnerable to delays and change orders

All of that puts huge pressure on cash flow. One study notes poor cash flow management is the primary cause of contractor failure, accounting for roughly 80%+ of construction business closures.

2. What Makes Construction Bookkeeping Different?

If you’ve ever tried to use a generic small business bookkeeping template for your jobs, you already know it doesn’t quite fit.

Construction bookkeeping has unique wrinkles:

  • Jobs, not just customers.
    You don’t just want a P&L for the whole company; you need profitability by project.
  • Job costing and cost codes.
    Labor, materials, subs, equipment and overhead must be tracked per job and per cost category, not just as a big lump of expenses.
  • WIP (Work in Progress).
    Projects cross month and year-end boundaries. You need to know if you’re over-billed or under-billed versus work actually completed.
  • Retainage and progress billing.
    A portion of your money might be trapped as retainage for months. If your books don’t track this, your cash flow view is false.
  • Change orders.
    If change orders aren’t logged and billed systematically, you end up doing free work.

A generic chart of accounts and simple P&L isn’t enough. You need a job-centric system.

3. The Building Blocks of a Solid Construction Bookkeeping System

Think of your bookkeeping as another system on the job, like your framing or MEP plan. If the foundation is wrong, everything above it is shaky.

3.1 Chart of accounts tailored for construction

At minimum, you want separate accounts for:

  • Income: contract revenue, change orders, service work
  • Direct costs: labor, subcontractors, materials, equipment, permits
  • Indirect costs (overhead): office salaries, rent, software, vehicles, insurance

A simple way to visualize this:

Category Direct (Job Cost) Examples Indirect (Overhead) Examples
Labor Carpenters, site supervisors on a job Office admin, estimator salary
Materials Concrete, lumber, fixtures per job Office supplies
Subcontractors Electrical sub, HVAC sub per project None (subs are typically job-specific)
Equipment Equipment rental charged to a job Depreciation on office equipment

Direct costs must be tagged to the exact job they belong to. Overhead supports the whole business and is tracked at company level.

3.2 Job numbers and cost codes

Every project needs a unique job number. Within each job, you track costs by cost code (e.g., 100 Sitework, 200 Foundation, 300 Framing, etc.).

This lets you:

  • Compare budget vs actual for each scope
  • See which parts of your work consistently eat margin
  • Improve your estimating over time

Without cost codes, you only find out if a job lost money after it’s too late to fix it.

3.3 Job costing as a core habit

Job costing isn’t optional anymore – it’s how profitable contractors survive. Modern guides on construction accounting all emphasize that accurate job costing is essential to understanding true job profitability and improving future bids.

In practical terms, job costing means:

  • Every invoice, paycheck, timesheet and bill is coded to a job and a cost code.
  • You can run a report for Job 2205 – Office Buildout and see revenue, labor, subs, materials, and margin in one view.

4. Step-by-Step: Setting Up Construction Bookkeeping for 2025–2026

You don’t have to rebuild everything overnight. Think in phases.

Step 1: Choose the right accounting + job costing tools

At a minimum you need:

  • Cloud accounting (e.g., QuickBooks Online, Xero, or a construction-focused system).
  • Job-costing capability — either built-in or via an integrated construction platform.

Look for:

  • Ability to track jobs and cost codes
  • Strong reporting for job P&L and WIP
  • Good integrations for payroll and time tracking

If you’re unsure how to structure tools, an experienced firm like House of Bookkeepers can set up a construction-specific stack and chart of accounts for you, rather than you guessing.

Step 2: Design your job cost structure

Keep it simple enough that your field and office teams will use it, but detailed enough to be useful.

You’ll want to define:

  • Standard cost codes (same list for all jobs)
  • Rules for when new codes can be created
  • Which codes are labor, which are subs, which are materials, etc.

Then apply this structure to every new contract.

Step 3: Budget every job

Every job should have:

  • A contract value (including known change orders).
  • A budget broken down by major cost codes (labor, subs, materials, etc.).

This is your benchmark. Without it, you’re driving blind.

Step 4: Daily and weekly workflows

Here’s what a basic weekly rhythm might look like:

  • Daily: Timesheets filled out with job and cost code; material invoices tagged to job immediately.
  • Weekly:
    • Enter all bills, receipts, and timesheets into your system.
    • Review any unapproved change orders and make sure they’re tracked in your job budget.

This doesn’t require a large back office – but it does require consistency.

Step 5: Monthly close and reporting

At the end of each month:

  • Reconcile bank and credit card accounts
  • Review job cost reports for each active project
  • Update your WIP schedule (see next section)
  • Review A/R and A/P aging
  • Produce a simple monthly financial package (P&L, balance sheet, job summary)

You’re aiming for a clean, repeatable close so that by the 10th–15th of the following month, you know exactly how you’re doing.

5. The Key Construction Reports You Should Watch

You don’t need 50 reports. You need a handful of powerful ones you actually look at.

Report What It Tells You Red Flags to Watch For
Job P&L (by project) Revenue, costs, and margin per job Jobs with negative or very low margin
Job Cost Detail Costs by cost code Codes consistently over budget
WIP (Work in Progress) Over-billed vs under-billed status for each job Large under-billings (doing work you haven’t billed)
A/R Aging Who owes you money and how long it’s overdue Old invoices, retention not followed up
A/P Aging Who you owe and when it’s due Habitual late payments, vendors put you on hold
Cash Flow Forecast (13 weeks) Expected cash in and out over next quarter Upcoming dips where expenses exceed inflows

When subcontractors accounted for the cost of working capital in their bids, one 2024 report found they saw 11% higher profit margins (14.1% vs 12.7%) than those who didn’t. That kind of margin gap is only visible if your reports are tight.

6. Common Construction Bookkeeping Mistakes That Kill Profit

Even good contractors fall into predictable traps. A few of the biggest:

Not tracking change orders properly.
Work gets done in the field faster than paperwork. If change orders aren’t logged and billed, you end up giving away unbilled labour and materials.

Underbilling (and over-relying on retainage).
If your WIP schedule shows you’re chronically under-billed, you’re basically financing the project for the client. Underbilling creates the illusion of lower profit early on, then nasty surprises later.

Mixing personal and business expenses.
Swiping the company card for personal items creates a mess at tax time and hides the true cost of running the business.

No job-level visibility.
If you only see company-wide P&L, you can’t tell which jobs are profitable and which ones are quietly bleeding.

Ignoring slow pay until it’s a crisis.
Given that a large share of contractors experience delayed payments – and many rely on credit lines to bridge the gap – you need a deliberate collections process, not wishful thinking.

7. A Simple Construction Bookkeeping Checklist for 2025–2026

Use this as a quick self-audit:

Structure

  • Every project has a unique job number.
  • You use standard cost codes across all jobs.
  • Your chart of accounts clearly separates direct job costs from overhead.

Daily/Weekly

  • Time is tracked by job and cost code.
  • All bills and receipts are entered and attached to jobs weekly.
  • Change orders are logged in both the job budget and your contract value.

Monthly

  • Bank and credit card accounts are fully reconciled.
  • You review job P&Ls and a WIP schedule every month.
  • A/R and A/P aging reports are reviewed, and overdue items are chased.
  • You produce a monthly P&L and balance sheet and actually read them.

If you can’t check most of these off yet, that’s not a failure – it’s simply a roadmap for what to build next.

8. Do You Need an In-House Bookkeeper or an Outsourced Team?

For many small and mid-sized contractors, the choice is:

  • Hire a full-time bookkeeper (often $55k–$60k+ per year when you include benefits and overhead),
  • Or work with an outsourced construction bookkeeping firm for a fraction of that, often $500–$2,000 per month depending on complexity.

Outsourcing is usually a better fit when:

  • You don’t have enough work for a full-time bookkeeper.
  • Your jobs are complex enough that you need proper job costing and WIP but don’t know how to build the system.
  • You’d rather focus on estimating, project management, and field ops instead of training and supervising accounting staff.

This is where House of Bookkeepers can make a real difference. They act as a specialized, remote bookkeeping department for contractors worldwide – setting up job-costed systems, keeping you on top of cash flow, and preparing clean books for your CPA or tax advisor.

Final Thoughts: Bookkeeping as a Profit Tool, Not Just Paperwork

Construction is too competitive, and margins are too slim, to treat bookkeeping as an afterthought.

In 2025–2026:

  • The average contractor lives on a single-digit margin.
  • Cash flow and financial mismanagement are still the main reasons contractors fail.