Glossary
Construction Terms & Definitions
Key construction bookkeeping and accounting terms explained in plain language.
A
Accounts Payable (Construction)
The amounts owed by a construction company to suppliers, subcontractors, and vendors for materials, labor, and services received but not yet paid. Effective AP management includes tracking payment terms, managing retainage payable, processing lien waivers, and maintaining compliance with prompt payment laws.
Accounts Receivable Aging
A report that categorizes outstanding invoices by the length of time they have been unpaid, typically in 30-day buckets (current, 30, 60, 90, 120+ days). In construction, AR aging is critical for monitoring payment delays from general contractors, managing retainage receivables, and maintaining healthy cash flow.
AIA Billing (G702/G703)
Standardized forms used in the construction industry for requesting monthly payments, consisting of a summary sheet and a detailed schedule of values.
ASC 606
The accounting standard (Accounting Standards Codification Topic 606) that governs revenue recognition for construction contracts. ASC 606 requires contractors to recognize revenue based on the transfer of control of goods or services, replacing the older percentage-of-completion guidance under ASC 605.
B
B&O Tax
A business and occupation tax based on the gross income of a business, specifically required for contractors operating in Washington State.
Backlog (Construction)
The total dollar value of signed contracts for work not yet completed. The backlog-to-revenue ratio—ideally 6-12 months of work—is a key financial health indicator showing future revenue visibility and capacity utilization.
Bad Debt (Construction)
Accounts receivable that a contractor determines are uncollectible, typically after 120+ days with no realistic collection prospect. The IRS allows bad debt deductions for amounts previously included in income (Source: IRC §166, Bad Debts).
Bid Bond
A type of surety bond submitted with a contractor's bid proposal, guaranteeing that the contractor will enter into the contract at the bid price if awarded. If the contractor fails to honor the bid, the bond compensates the project owner for the difference.
Bookkeeping Checklist (Construction)
<p>A <strong>bookkeeping checklist for construction</strong> is a systematic list of recurring financial tasks that construction companies must complete on a daily, weekly, monthly, and annual basis to maintain accurate books and stay compliant with industry regulations.</p> <h2>Why Construction Companies Need a Bookkeeping Checklist</h2> <p>Construction businesses face unique accounting challenges—job costing across multiple projects, retention tracking, progress billing, certified payroll, and complex tax obligations. A structured checklist prevents costly oversights, supports accurate WIP (Work-in-Progress) reporting, and ensures your financials are audit-ready at all times.</p> <h2>Daily Bookkeeping Tasks</h2> <ul> <li><strong>Record all transactions</strong> — Log every expense, payment, and receipt as they occur. Waiting leads to lost documentation and inaccurate job costs.</li> <li><strong>Track labor hours by job</strong> — Allocate crew hours to specific projects for accurate job costing and payroll compliance.</li> <li><strong>Review accounts payable</strong> — Confirm vendor invoices match purchase orders and delivery receipts before scheduling payment.</li> <li><strong>Categorize expenses</strong> — Assign costs to the correct job, cost code, and expense category (materials, labor, subcontractor, equipment, overhead).</li> </ul> <h2>Weekly Bookkeeping Tasks</h2> <ul> <li><strong>Bank reconciliation</strong> — Match bank transactions against your books to catch errors, duplicates, or unauthorized charges early.</li> <li><strong>Process payroll</strong> — Calculate wages including overtime, per diem, union fringe benefits, and certified payroll requirements for prevailing wage jobs.</li> <li><strong>Update job cost reports</strong> — Review cost-to-date vs. budget for every active project to identify overruns before they become critical.</li> <li><strong>Manage lien waivers</strong> — Collect conditional and unconditional lien waivers from subcontractors before releasing payments.</li> </ul> <h2>Monthly Bookkeeping Tasks</h2> <ul> <li><strong>WIP schedule review</strong> — Calculate over/under billings using the percentage-of-completion method to understand true profitability.</li> <li><strong>AIA billing preparation</strong> — Complete G702/G703 pay applications for progress billing on commercial and public works projects.</li> <li><strong>Sales and use tax filing</strong> — Construction materials and services have varying tax obligations by state and municipality.</li> <li><strong>Accounts receivable aging</strong> — Follow up on past-due invoices to maintain healthy cash flow.</li> <li><strong>Equipment depreciation</strong> — Record monthly depreciation for owned equipment and heavy machinery.</li> </ul> <h2>Quarterly and Annual Tasks</h2> <ul> <li><strong>Estimated tax payments</strong> — File quarterly federal and state estimated taxes to avoid underpayment penalties.</li> <li><strong>Financial statement preparation</strong> — Generate balance sheet, income statement, and cash flow statement for bonding and banking requirements.</li> <li><strong>1099 preparation</strong> — Track subcontractor payments exceeding $600 for year-end 1099-NEC filing.</li> <li><strong>Bond capacity review</strong> — Ensure your financial statements support your target bonding limits for upcoming bids.</li> <li><strong>Year-end close</strong> — Reconcile all accounts, close out completed jobs, and prepare for CPA review or audit.</li> </ul> <h2>Common Mistakes to Avoid</h2> <p>The most frequent bookkeeping errors in construction include: mixing personal and business expenses, failing to allocate indirect costs across jobs, not tracking change orders in real time, and neglecting retention receivable/payable balances. Each of these can distort profitability reports and create problems during audits or bonding reviews.</p> <p>By following a comprehensive construction bookkeeping checklist, contractors can maintain financial clarity, maximize tax deductions, strengthen bonding capacity, and make data-driven decisions on every project.</p>
Builder's Risk Insurance
Builder's risk insurance (also called course of construction insurance) covers damage to a building under construction from events like fire, wind, theft, or vandalism. The policy typically covers the structure, materials, and equipment on site. Coverage ends when the project is complete or the building is occupied.
Burdened Hourly Rate
The comprehensive hourly cost of a worker that includes both the base wage and the prorated labor burden expenses. Using this figure instead of the 'raw' wage in spreadsheets ensures that project budgets account for the total cash outflow associated with field labor. (Source: IRS Publication 15, Circular E)
Burdened Labor Rate
The total cost of employing a worker beyond just their hourly wage, including payroll taxes, workers' compensation, insurance, and benefits. For accurate job costing, contractors must use the burdened rate to ensure project pricing covers the true cost of labor. (Source: Small Business Administration)
Business Unit
An organizational division within a construction or service company that separates operations by trade (HVAC, Plumbing, Electrical) or by service type (Service, Installation, New Construction). Business Units enable per-division profitability analysis and reporting.
C
Cash Flow Forecast
A financial projection that maps expected cash inflows (progress billings, retainage releases, change order payments) against outflows (payroll, materials, sub payments, overhead) over a defined period—typically 13 weeks—to identify future cash gaps before they become emergencies.
Cash Flow Forecasting
The process of estimating future financial inflows and outflows over a specific period to ensure the business maintains sufficient liquidity for payroll and materials. Accurate forecasting allows contractors to identify potential shortfalls before they occur and make informed decisions on equipment purchases or project bidding. (Source: Construction Financial Management Association)
Certified Payroll
Detailed reports required on government-funded projects that prove workers are being paid the legally required prevailing wage.
Change Order
A formal request to change the scope of work, price, or schedule of a construction contract after the original agreement is signed.
Change Order Variance
The measurement of the difference between the original contract sum and the final contract sum resulting from additions or subtractions to the scope of work. Monitoring this KPI is critical in remodeling to ensure that 'scope creep' is captured and billed at the appropriate margin. (Source: American Institute of Architects - AIA)
Chart of Accounts
A structured list of all financial accounts used by a construction company to categorize income, expenses, assets, and liabilities. A construction-specific chart of accounts includes job cost categories, equipment accounts, retainage, and work-in-progress accounts for accurate financial reporting.
Committed Costs
The total value of subcontracts and purchase orders that have been executed but may not yet be fully invoiced or paid. Committed costs represent contractual obligations that will become actual costs as work is performed. In Procore, committed costs are tracked through the Commitments module.
Conditional Lien Waiver
A document signed by a contractor or subcontractor that waives lien rights only after payment has been received and cleared. Unlike unconditional waivers, conditional waivers protect the signer by keeping lien rights intact until funds are confirmed.
Construction Audit Preparation
The process of organizing financial records, job cost reports, contracts, change orders, and compliance documentation in advance of a financial or regulatory audit. Proper preparation ensures accuracy in WIP schedules, revenue recognition, and payroll compliance.
Construction Budget
A financial plan that forecasts all costs for a construction project before work begins, translating the estimate into spending targets across labor, materials, subcontractors, equipment, and overhead—with contingency and markup—to guide profitability throughout the project lifecycle.
Construction Cash Flow Management
The process of monitoring, analyzing, and optimizing the timing of cash inflows and outflows on construction projects. Effective cash flow management accounts for retainage holdbacks, payment terms, material purchases, and progress billing cycles to avoid liquidity shortfalls.
Construction Equipment Depreciation
The systematic allocation of the cost of heavy equipment and machinery over its useful life for tax and accounting purposes. Construction companies can use methods like straight-line, MACRS, or Section 179 expensing to maximize tax deductions on equipment purchases.
Construction Financial Statements
Financial reports tailored to the construction industry, including the balance sheet, income statement, cash flow statement, and WIP schedule. These statements reflect job-specific revenue recognition, retainage, and overbilling/underbilling positions unique to construction accounting.
Construction Payment Dispute
A disagreement between parties on a construction project regarding payment terms, amounts, change orders, or completion milestones. Common causes include disputed change orders, incomplete work claims, retainage disputes, and slow-pay practices. Resolution mechanisms include preliminary notices, mechanics liens (RCW 60.04 in Washington), prompt pay act enforcement, mediation, and arbitration. Proper documentation and bookkeeping are the contractor's best defense in payment disputes.
Contingency (Construction)
A budget line item—typically 5-10% of estimated project costs—that covers unforeseen expenses, scope gaps, or conditions not apparent during estimating. Remodels and occupied-space projects typically warrant higher contingency than new construction.
Contractor License (RCW 18.27)
A mandatory registration required under Washington State law (RCW 18.27) for any person or entity performing construction work. Registration requires a surety bond, liability insurance, and workers' compensation coverage through the Department of Labor & Industries.
Cost Code
A standardized numerical or alphanumerical code used to categorize construction costs by type of work (e.g., 03-Concrete, 26-Electrical). Cost codes are used in project management software like Buildertrend and Procore to track expenses against budgets. Commercial contractors typically align cost codes with the CSI MasterFormat system.
Cost Codes
Numerical identifiers used to categorize specific types of work or materials within a project budget, such as '06-100' for Rough Carpentry. These codes allow general contractors to track spending at a detailed level and identify exactly where a project is over budget. (Source: CSI MasterFormat)
Cost to Complete
The estimated remaining cost to finish a construction project, calculated as the total estimated cost at completion minus costs incurred to date. Cost to complete is a critical input for WIP reporting and percentage-of-completion calculations.
Current Ratio
A liquidity metric calculated by dividing current assets by current liabilities. Surety companies and banks use it to evaluate a contractor's ability to meet short-term obligations. A healthy range for construction companies is 1.3-2.0 (Source: 40 USC §3131, Miller Act).
D
Davis-Bacon Act
A federal law requiring contractors and subcontractors on federally funded construction projects to pay workers prevailing wages and fringe benefits as determined by the Department of Labor. Compliance includes certified payroll reporting and proper recordkeeping.
Direct Costs
Expenses that can be specifically identified and attributed to a single construction project, such as onsite labor, raw materials, and subcontractor fees. These costs form the baseline of the job cost report and are essential for calculating the project's gross profit. (Source: IRS Publication 538)
Draw Schedule
A draw schedule is a timeline that outlines when a contractor or builder can request payments (draws) from a lender or owner during a construction project. Each draw corresponds to a completed milestone or percentage of work, and typically requires inspection before funds are released. Draw schedules are standard in residential construction and renovation lending.
E
ERP Integration
The connection between a construction project management platform (such as Procore, Buildertrend, or ServiceTitan) and an accounting system (such as QuickBooks, Sage 300 CRE, or Viewpoint). ERP integration syncs financial data between systems to eliminate double entry.
Estimated Tax Payments
Quarterly tax payments made by construction businesses to the IRS and state tax agencies to cover expected income tax, self-employment tax, and other obligations. Contractors who expect to owe $1,000 or more in taxes must make estimated payments using IRS Form 1040-ES to avoid underpayment penalties (Source: IRS Publication 505).
Experience Modification Rate (EMR)
The Experience Modification Rate (EMR) is a multiplier used by insurance companies to adjust a contractor's workers' compensation premium based on their claims history compared to industry averages. An EMR below 1.0 indicates fewer claims than average (lower premiums), while above 1.0 means more claims (higher premiums). Many project owners require an EMR below 0.85 for bid eligibility.
L
Labor Burden
The total employer cost of a construction worker beyond their base hourly wage, including FICA (7.65%), FUTA, SUTA, workers' compensation insurance, health benefits, and paid leave. Labor burden typically adds 30-45% on top of raw wages (Source: IRC §3101-3102).
Lien Waiver
A legal document where a contractor or supplier gives up their right to place a lien against a property in exchange for payment.
M
MACRS Depreciation
Modified Accelerated Cost Recovery System (MACRS) is the tax depreciation method required by the IRS for most business assets, including construction equipment. Under MACRS, heavy construction equipment typically falls under 5-year or 7-year property classes, allowing accelerated write-offs. Combined with Section 179 expensing and bonus depreciation, MACRS enables contractors to significantly reduce taxable income in the year equipment is placed in service. (Source: IRC §168, IRS Publication 946)
Mechanics Lien
A legal claim against a property by a contractor or supplier who has not been paid for work or materials provided.
Multi-State Nexus
Multi-state nexus refers to the tax obligation a construction company triggers when it performs work in a state other than its home state. Nexus can be established through physical presence, employees, or revenue thresholds, and may require the contractor to register, collect sales tax, file income tax returns, and comply with that state's labor and licensing laws.
O
OSHA Recordkeeping
The mandatory documentation of workplace injuries, illnesses, and safety incidents as required by the Occupational Safety and Health Administration. Construction companies with more than 10 employees must maintain OSHA 300 logs and submit annual summaries.
Over-billing
A situation where a contractor has billed for more work than has actually been completed, which appears as a liability on the balance sheet.
Overbillings / Underbillings
Financial adjustments on a balance sheet that account for the difference between the amount billed to a client and the actual costs incurred plus earned profit. 'Overbilling' (billings in excess of costs) can provide a temporary cash cushion, while 'underbilling' indicates earned revenue that has not yet been cashed, potentially straining liquidity. (Source: FASB/GAAP)
Overhead Allocation
The process of distributing indirect business expenses, like office rent or insurance, across various construction projects.
Overhead Rate
The ratio of indirect costs (rent, insurance, office staff, vehicles, utilities) to direct costs or revenue in a construction business. Typical overhead rates for trade contractors (HVAC, plumbing, electrical) range from 25-50% of revenue. Accurate overhead calculation is critical for job pricing, profit margin analysis, and financial planning. Overhead is often allocated to individual jobs using labor hours, direct costs, or revenue-based methods.
P
Payroll Burden Rate
The total cost of employing a worker beyond their base hourly wage, including employer-paid FICA taxes (7.65%), federal and state unemployment taxes (FUTA/SUTA), workers' compensation insurance, health insurance, retirement contributions, and paid time off. In construction, burden rates typically range from 35-50% above base wages according to the Bureau of Labor Statistics.
Percentage of Completion
An accounting method that recognizes revenue and expenses as a project progresses, rather than waiting until the job is completely finished.
Performance Bond
A surety bond that guarantees a contractor will complete a project according to the contract terms. If the contractor defaults, the surety company steps in to ensure project completion, protecting the project owner from financial loss.
Prevailing Wage
The minimum hourly wage rate set by the government that must be paid to workers on public works construction projects.
Pricebook
A comprehensive catalog of services, materials, and equipment with predefined pricing used by mechanical and service contractors. In ServiceTitan, the Pricebook includes material costs, estimated labor hours, burdened labor rates, overhead allocation, and target profit margins.
Production Rate
A measurement of labor efficiency defined by the amount of work completed within a specific timeframe (e.g., linear feet of pipe installed per hour). Tracking this in spreadsheets allows contractors to compare actual performance against original estimates to identify labor cost overruns early. (Source: ASPE - American Society of Professional Estimators)
Profit Margin (Construction)
The percentage of revenue remaining after all direct and indirect costs are deducted from a construction project. Gross profit margin measures revenue minus direct job costs, while net profit margin accounts for overhead, G&A expenses, and taxes. Industry benchmarks typically range from 5-10% net for general contractors and 10-20% for specialty trades.
Progress Billing
A billing method where invoices are submitted at regular intervals based on the percentage of work completed on a construction project. Progress billing aligns revenue recognition with project milestones and is commonly used alongside AIA G702/G703 forms.
Progress Billings
An invoicing method that bills for costs incurred and work completed during a specific timeframe rather than waiting until the total project is finished. This mechanism is critical for maintaining steady cash flow to cover ongoing labor and material expenses throughout a multi-month project lifecycle. (Source: AICPA)
Progress Invoicing
A billing method where a contractor invoices for a percentage of completed work on a project rather than billing the entire contract amount at once. In QuickBooks, this is handled through the Progress Invoicing feature which creates invoices from estimates based on percentage complete per line item.
Prompt Pay Act
State and federal legislation requiring timely payment to contractors and subcontractors on construction projects. Washington's Prompt Pay Act (RCW 39.04.250) mandates payment within 30 days on public projects. Violations may entitle the payee to interest, attorney fees, and other remedies. Proper bookkeeping and documentation of payment timelines is essential for enforcing prompt pay rights.
Purchase Order (PO) Management
The systematic tracking of legally binding documents sent to suppliers to procure materials, such as conduit or switchgear, at a fixed price. Effective PO management ensures that material costs are committed to the job budget as soon as the order is placed, preventing 'blind' spending. (Source: National Electrical Contractors Association)
Q
Qualified Business Income (QBI) Deduction
A 20% tax deduction on qualified business income available to owners of pass-through entities (S-Corps, LLCs, sole proprietorships). Phase-out limits apply above $191,950 (single) and $383,900 (married filing jointly) for specified service trades (Source: IRC §199A).
QuickBooks (Construction)
A widely used accounting software platform that offers construction-specific features including job costing, progress invoicing, and class tracking. QuickBooks Desktop Contractor edition and QuickBooks Online with construction add-ons help contractors manage payroll, AP/AR, and financial reporting in a single system.
R
Retainage
A percentage of the contract price withheld by the customer until the project is completed to ensure the work is done correctly.
Retainage Release
Retainage release is the process of paying the withheld percentage (typically 5-10%) of a construction contract after the project reaches substantial completion. Release timing is governed by state law — in Washington, retainage must be released within 60 days of project acceptance per RCW 60.28. Contractors must often submit final lien waivers and close out documentation before release.
Retention (Retainage)
A portion of a contract price, typically 5-10%, intentionally withheld by the owner until the project is substantially complete to ensure the contractor finishes all work. Managing retainage is a vital component of cash flow strategy, as these funds often represent the contractor's entire profit margin on a job. (Source: Internal Revenue Service)
S
Sales Tax on Construction Materials
The application of state and local sales tax to building materials, supplies, and equipment purchased for construction projects. Rules vary by state — in Washington, contractors generally pay sales tax on materials at purchase and may owe use tax on items brought from out of state.
Schedule of Values
A detailed list that breaks down the entire contract amount into specific parts or phases of work, used as the basis for progress billings.
Single Audit
A financial audit required for entities that expend $750,000 or more in federal awards during a fiscal year. Construction companies with federal contracts above this threshold must comply with 2 CFR Part 200, Subpart F (Source: 2 CFR §200.501).
Slippage
The negative variance between the original estimated gross profit and the actual gross profit realized at the end of a project. Tracking slippage helps remodeling contractors identify if profit loss is occurring due to estimating errors or field inefficiencies. (Source: National Association of Home Builders - NAHB)
Subcontractor Prequalification
Subcontractor prequalification is the process general contractors use to evaluate a subcontractor's financial stability, insurance coverage, safety record, and work history before awarding a contract. Financial vetting typically includes reviewing balance sheets, bonding capacity, and references to minimize the risk of default or project delays.
Surety Bond
A guarantee from a third party that a contractor will complete a project or pay for any losses if they fail to meet the contract requirements.
U
Unconditional Lien Waiver
A document that immediately and irrevocably waives a contractor's or subcontractor's right to file a lien, regardless of whether payment has been received. Unconditional waivers are typically exchanged after payment has cleared and carry more risk for the signer.
Under-Billing
A situation where the revenue earned on a construction project exceeds the amount billed to the client. Under-billings represent an asset on the balance sheet and indicate that more work has been completed than invoiced, which can strain cash flow if not managed properly.
Use Tax
Use tax is a tax on tangible personal property purchased out of state (or untaxed) but used within the state. In construction, use tax commonly applies when materials are purchased from out-of-state suppliers who did not collect sales tax. Washington State imposes use tax at the same rate as sales tax, and contractors are responsible for self-reporting it.
W
Washington L&I
Washington State's Department of Labor & Industries, which administers workers' compensation insurance, prevailing wage requirements, and contractor licensing. Contractors must register with L&I, pay industrial insurance premiums, and comply with safety regulations.
WIP Fade
The difference between a project's estimated gross margin and its final actual gross margin upon completion. Consistent WIP fade above 2% indicates systematic underestimating in the bidding process, eroding profitability across the contractor's portfolio (Source: FASB ASC 340-40).
WIP Report
A financial report that compares the costs incurred to the estimated total costs to determine if a project is ahead of or behind its billing schedule.
Work in Progress (WIP)
A financial accounting process used to determine the overbillings and underbillings on active projects by comparing actual costs incurred to the estimated total costs. Accurate WIP reporting ensures that revenue is recognized based on the percentage of completion rather than just cash flow. (Source: Construction Financial Management Association - CFMA)
Work in Progress (WIP) Reporting
An accounting schedule that monitors the financial health of active projects by comparing total estimated costs to actual costs incurred to date. It allows contractors to recognize revenue based on the percentage of completion, which is critical for maintaining accurate balance sheets and bonding capacity. (Source: AICPA)
Work-in-Progress (WIP) Report
A financial tool used to track the progress of active projects by comparing the costs incurred to date against the total estimated costs. It helps contractors identify if a project is over-billed or under-billed, ensuring the balance sheet accurately reflects earned revenue. (Source: AICPA Audit and Accounting Guide for Construction)
Worker Classification
The determination of whether a worker is an employee or an independent contractor for tax and labor law purposes. Misclassification in construction can lead to IRS penalties, back taxes, and liability for unpaid benefits. The IRS uses behavioral, financial, and relationship factors to make this determination.
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