Understanding Construction Accounting: A Complete Guide for Builders and Contractors

Introduction

If you work in construction, you know that no two projects are alike. Budgets shift, materials vary in price, subcontractors come and go, and payments rarely arrive when expected. So it’s no surprise that your accounting needs are very different from other industries.

Construction accounting is a specialist approach designed to manage project-based finances, irregular cash flow, and complex compliance requirements like CIS and the VAT Reverse Charge.

At Hammond & Co, we work with builders, developers, and contractors every day. We help you keep your books accurate, your projects profitable, and your HMRC obligations on track. This guide covers the four key questions every construction business should understand:

• What is construction accounting?
  
• How does it differ from standard accounting?
  
• What should you look for in construction accounting software?
  
• What accounting methods do construction companies use?
  

What Is Construction Accounting?

Construction accounting is a specialised form of accounting tailored to the building industry. Unlike standard accounting, which tracks overall business income and expenses, construction accounting links finances directly to individual projects — which can run for months or even years.

Each project is treated like a mini business, with records for:

• Labour costs (employees and subcontractors)
  
• Materials, plant hire, and site overheads
  
• Stage payments and retentions
  
• CIS deductions and reverse-charge VAT
  
• Profit per job
  
• Timing differences between work completed and payments received
  

This approach gives directors a clear picture of project profitability and cash flow, rather than just total turnover. At Hammond & Co, we design reporting systems that show you real-time insights per site, per contract, and per team.

Construction Accounting vs Standard Accounting

Construction accounting is more complex than standard business accounting. Here’s how they differ:

Construction businesses need accountants who understand these nuances. Hammond & Co turns complexity into clarity, giving you accurate reports, timely returns, and reliable profit forecasts.

What to Look for in Construction Accounting Software

The right software can transform your business. Construction accounting involves invoices, subcontractors, purchase orders, site costs, and staged payments — all of which need to tie together. Look for:

1. Cloud access – Update accounts anywhere with Xero or similar.
   
2. Job costing & project tracking – See profitability per project.
   
3. CIS & payroll integration – Automatic verification, deductions, and payslips; BrightPay works well.
   
4. Reverse Charge VAT handling – Ensure compliant invoices and correct VAT codes.
   
5. Receipt capture – Apps like Dext or Hubdoc let you photograph and upload receipts instantly.
   
6. Reporting & forecasting – Dashboards for cash flow, project profitability, and tax planning.
   

At Hammond & Co, we implement:

• Xero for bookkeeping
  
• Dext / Hubdoc for invoices and receipts
  
• BrightPay for payroll & CIS
  
• SmartVault for secure document storage
  

We also provide training and ongoing support, so your systems work as hard as you do.

Accounting Methods Used in Construction

Construction businesses often use one or more methods to recognise revenue and costs:

1. Cash Basis Accounting

Records transactions when cash changes hands.

✅ Simple for small contractors
❌ Doesn’t reflect long projects accurately
❌ Can distort profit if invoices remain unpaid

2. Accrual Accounting

Records income and costs when earned or incurred.

✅ Accurate for multi-month projects
✅ Clearer tax and profit picture
❌ Requires more detailed management

3. Percentage-of-Completion

Revenue and costs are recognised based on work completed.

✅ Matches profit to project progress
✅ Standard for larger contracts
❌ Requires reliable progress tracking

4. Completed-Contract Method

Records revenue and costs only when a project finishes.

✅ Simpler for short-term jobs
❌ Profit and tax timing can fluctuate

5. Retention & Stage Payment Adjustments

Tracks income even if part of the payment is withheld. Retentions should be recorded separately to avoid overstatement.

Hammond & Co helps clients select the right approach — often combining accrual accounting with project-based reporting and CIS reconciliation.

Why Construction Businesses Need a Specialist Accountant

Knowing the methods is one thing; applying them under HMRC rules is another. Mistakes in CIS, VAT, or stage payments can create compliance risks and cash-flow problems. A construction-specialist accountant ensures:

• CIS and VAT Reverse Charge are applied correctly
  
• Stage payments and retentions are recorded accurately
  
• Project profitability and cash flow are clear in real time
  
• Payroll integrates seamlessly with job costs
  
• Tax liabilities are forecasted before deadlines
  

At Hammond & Co, we support construction businesses month after month — not just once a year — so you can grow profitably and confidently.

How Hammond & Co Supports Construction Clients

We offer a fully managed service for builders, contractors, and developers:

• Bookkeeping & CIS management – Real-time, compliant processing
  
• Payroll & subcontractor payments – HMRC verified via BrightPay
  
• VAT & Reverse Charge management – Correct codes, accurate filings
  
• Month-9 tax reviews – Forecast liabilities before year-end
  
• Cash flow & project profitability reports – Always know your position
  
• Cloud system setup & training – Xero, Dext, Hubdoc, SmartVault configured for your team
  

You build the projects; we build the financial systems that support them.

Key Takeaways

• Construction accounting is project-focused, not just profit-and-loss focused
  
• It manages CIS, retentions, staged payments, and reverse-charge VAT
  
• Cloud-based, CIS-enabled, job-costing software is essential
  
• Percentage-of-completion or accrual accounting gives clearer insight than cash accounting
  
• A specialist accountant ensures accuracy, compliance, and profitability
  

Conclusion

Construction is fast-moving and complex — but your accounting doesn’t have to be. With the right systems and specialist guidance, you can manage cash flow confidently, stay HMRC-compliant, and make informed growth decisions.

At Hammond & Co, we’re more than accountants — we’re partners in building a financially secure future. From CIS to payroll, VAT to cash-flow forecasting, we understand your challenges and simplify them.

Ready to build stronger financial foundations for your construction business? Hammond & Co can help.