Construction Accounting Glossary: Key Terms Every Contractor Should Know

Understanding construction accounting is essential for managing projects, controlling costs, and ensuring compliance. Onware Inc. provides BI solutions, helping construction professionals connect accounting systems to real-time dashboards, improve job cost visibility, and simplify financial reporting. 

This glossary organizes critical terms by category, covering contracts, revenue recognition, job costing, compliance, and financial reporting. Whether you’re an estimator, project manager, or accountant, this guide will help you navigate complex financial concepts. Bookmark it for easy reference.

Basic Concepts in Construction Accounting

Accounts Payable

Money a company owes to suppliers for goods or services it has already received but not yet paid for. These unpaid amounts are listed as current liabilities on the balance sheet because they are due within a short period.

Accounts Receivable

Money owed to the company by customers for goods or services already provided but not yet paid for. These amounts are listed as current assets on the balance sheet because they are expected to be collected soon.

Assets

Assets are resources a company owns that have value and can provide future economic benefits. They are usually measured in money and can be converted into cash. Assets are classified as current (used or converted within a year, like cash or receivables) or noncurrent (long-term items like property, equipment, or land). Assets can be tangible (physical items such as machinery) or intangible (non-physical items like goodwill).

Liabilities

Liabilities are amounts a company owes, either in cash or through services it must provide in the future. They represent obligations to pay others and are typically shown on the balance sheet.

Liquidity

Liquidity measures how easily a company can use its current assets to pay off its current liabilities when they come due. In short, it shows the business’s ability to meet short-term obligations.

Equity

Equity represents the value that remains after subtracting a company’s liabilities from its assets. It shows the owner’s stake or net worth in the business. In other words, equity reflects the rights to the company’s property after all debts are paid.

Lien

A legal right that allows a party to claim or hold property until a debt or obligation is satisfied. In construction, this often takes the form of a mechanic’s lien, which contractors, subcontractors, or suppliers can file if they are not paid for work or materials. Liens impact construction accounting because they represent a potential liability and must be tracked carefully to avoid payment disputes and project delays.

General Ledger

the central record of all financial transactions for a business. It contains every debit and credit entry across all accounts, organized by account type. The GL is the foundation for preparing financial statements like the balance sheet and income statement.

Financial Reporting and Key Financial Documents

Chart of Accounts 

A structured list of all the accounts a company uses to record its financial transactions in the general ledger. It organizes accounts into categories like assets, liabilities, equity, income, and expenses, making it easier to track and report financial activity.

• Typical Account Number Series:
  • 1000 – Assets
  • 2000 – Liabilities
  • 3000 – Equity
    Formula: Assets (own) – Liabilities (owe) = Equity (net worth).
• Income Statement Account Series:
  • 4000 – Revenue
  • 5000 – Cost of Construction
    • 5010 – Labor
    • 5020 – Materials
    • 5030 – Subcontractors
    • 5040 – Equipment
  • 6000 – Indirect Costs
  • 7000 – Expenses (G&A or Overhead)
  • 8000 – Other Income/Expense

Trial Balance

An internal accounting report that lists all the accounts in the general ledger along with their debit and credit balances at a specific point in time. Its purpose is to check that total debits equal total credits, ensuring the books are mathematically correct before preparing financial statements. It is not a formal financial statement and is mainly used by accountants as a checkpoint.

Financial Statement

A report that summarizes a company’s financial information. The main statements include the balance sheet, income statement, and cash flow statement, which together show the organization’s financial position, performance, and cash movements.

Balance Sheet

A financial report that shows a company’s position at a specific point in time. It lists what the business owns (assets), what it owes (liabilities), and the owner’s stake (equity), giving a clear snapshot of overall financial health.

Income Statement

A report that shows a company’s financial performance over a specific period. It lists revenues earned and expenses incurred, helping determine whether the business made a profit or a loss during that time.

Cash Flow Statement

A financial report that shows where cash came from and how it was spent during a specific period. It details cash inflows and outflows from operations, investing, and financing activities. The ending cash balance from this statement matches the cash account shown on the balance sheet.

Want to make generating balance sheets, income statements, and cash flow reports easier?
At Onware Inc., we help construction companies connect their accounting systems to BI tools for real-time reporting, automate data extraction, and build financial reporting dashboards that save hours of manual work.

Schedule a discovery call today to see how we can simplify your financial reporting.

Work In Progress (WIP), Job Costing and Job Cost Reporting

Job Cost System

A job cost system helps track and manage project expenses accurately. Its main goals include:

• For Management: Provide clear, useful financial data for decision-making.
• For Project Management: Act as a risk management tool for each job.
• For Estimating: Supply cost information to improve competitiveness during and after projects.

 Consistency in costing methods is critical to build reliable cost data over time, which ensures accurate job cost reporting and meaningful BI dashboards that give project teams clear, real-time visibility into performance and costs.

Direct Cost

Costs that can be traced directly to a specific project or job. These usually include materials, labor, equipment, and subcontractors’ services used on that project. Direct costs are charged to the job because they are clearly linked to its completion.

Indirect Costs

Expenses that cannot be tied to a single project directly. These include costs like office supplies, non-field supervision, utilities, and other overhead items that support multiple jobs rather than one specific project.

Overhead Costs

The combined expenses needed to run a project that are not classified as direct costs. These often include administrative support, equipment depreciation, insurance, and other general expenses. Overhead is sometimes called “burden” because it represents the extra cost added to direct costs to cover business operations. 

Indirect costs are project-related expenses that cannot be traced to a single job, while overhead costs include broader business expenses that support overall operations and multiple projects.

Work in Progress (WIP)

WIP refers to the value of construction work that has been started but not yet completed or billed. It helps track project progress and is used to calculate revenue recognition and percent complete for financial reporting.

Revenue Recognition

An accounting principle that determines when and how a company records revenue in different context. In construction, this is especially important because projects often span months or years, and payments do not always match the work completed.

Common methods include:

Cash Method

Revenue recorded when cash is received. Primarily fox tax.

Accrual Method

Revenue recorded when earned, regardless of payment. Primarily for accounting purposes

Completed Contract Method

Revenue recognized only when the project is finished. Primarily fox tax.

Percentage of Completion (PCM)

A method used to measure how much of a project is finished based on costs incurred. The most common approach is the cost-to-cost method, which calculates completion as:

Costs to Date ÷ Total Estimated Costs (a.k.a. Estimated Cost at Completion (ECAC))

This percentage is then applied to the contract value to determine revenue earned for financial reporting. Other methods consider physical progress (such as percent of work installed) or labor hours completed compared to total estimated hours.

Earned Revenue

The amount of revenue recognized based on project progress. It is calculated using the formula:

Earned Revenue = Percentage of Completion × Contract Value

This figure shows how much income should be recorded for work completed, even if the amount billed to the client is different.

Many contractors monitor earned revenue, job costs, and billing status through construction reporting dashboards to better understand project financial performance over time.

Billed Amount

The total value invoiced to the client for work performed. Unlike Earned Revenue, which reflects revenue recognized based on project progress, billed amount shows what has been requested for payment, which may be higher or lower than earned revenue depending on billing schedules.

Overbilling (Bill in Excess)

When the amount billed to the client is higher than the revenue earned based on project progress. This creates a liability on the balance sheet because the company has invoiced more than it has earned under the contract terms.

It is generally considered better practice than underbilling from a cash flow perspective.

Underbilling (Cost in Excess)

When the revenue earned based on project progress is higher than the amount billed to the client. This creates an asset on the balance sheet because work has been completed but not invoiced. Underbilling is not ideal for cash flow, as it delays payment and increases financial risk.

Change Orders

A formal document that modifies the original construction contract. Change orders are used when there are adjustments to scope, cost, or schedule after the contract is signed. They must be approved by both the contractor and the owner and are critical for accurate job costing and financial reporting. In some cases, change orders involve claims from the contractor to the owner for additional time or compensation due to unforeseen conditions or disputes.

Claim

A formal request by a contractor for extra payment or more time to complete work. Claims usually arise when the contractor faces financial loss due to owner-related issues such as delays, design changes, specification errors, or unapproved change orders. Not every contract adjustment is a claim—only those involving disputes or added costs. Common types of claims include:

• Delay
• Disruption
• Changed Conditions
• Changes in Scope
• Acceleration
• Termination

Need better visibility into job costs across multiple projects?

At Onware Inc., we specialize in integrating with leading construction job cost systems like Viewpoint, CMiC, and eCMS to deliver customized construction dashboards, job cost reports, and real-time reporting. Our solutions help you track labor, materials, and overhead in real time—for jobs spread across thousands of miles—so you can stay on budget and make informed decisions.

Schedule a discovery call today to see how we can simplify your job cost reporting.

Bids & Contracts

Contract Life Cycle

The contract life cycle in construction includes four main stages:

Prebid/Bid

Contractors review project requirements, prepare estimates, and submit bids to win the job. Construction site should be physically inspected to identify potential risks.

Contract Award

The project owner selects a contractor and sends them the Notice of Intent to Aware or Notice to Proceed. Contractor should finalize bond & insurance and change estimate into budget on the job cost system.

Contract Performance

Work begins, and the contractor manages labor, materials, and compliance to meet project specifications. The project manager should be vigilant on areas that can potentially cause change orders.

Contract Completion

The project is finished, final inspections are done, and all payments and closeout documents are processed. Feedback on the estimate from the frontline operations team is crucial.

Bid 

A formal proposal submitted by a contractor to perform all or part of a project for a specific price. A proper bid includes terms and conditions, and may also list exclusions or alternative options. It must follow the project’s specifications and be submitted within the required deadline.

Bid Bond

A guarantee issued by a surety company on behalf of a contractor. It assures the project owner that if the contractor’s bid is accepted, the contractor will sign the contract and provide a performance bond as required. This protects the owner from financial loss if the contractor fails to follow through.

Different Types of Construction Contracts

Construction projects use different contract types to define pricing, risk, and responsibilities between the owner and contractor, each suited for specific project conditions and goals.

Fixed Price Hard Bid

The contractor agrees to complete the project for a set price based on competitive bidding. The risk of cost overruns falls on the contractor.

Fixed Price Negotiated

A contract where the owner and contractor agree on a set price through direct negotiation, rather than competitive bidding. This approach is often used when the owner values qualifications, experience, or a collaborative relationship over the lowest price. It provides flexibility for scope discussions before finalizing the fixed amount.

Cost Plus Fee with Guaranteed Maximum Price (GMP)

The owner pays actual costs plus a fee, but the total cost cannot exceed an agreed maximum amount.

Cost Plus Fee (No GMP)

The owner pays actual costs plus a fee without a cap, which gives flexibility but increases risk for the owner.

Unit Price

The contractor charges a set price per unit of work (e.g., per cubic yard of concrete). Final cost depends on actual quantities installed.

Time & Materials

The owner pays for labor at agreed hourly rates and for materials at cost, plus a markup. Common for projects with uncertain scope.

Construction Management

The contractor acts as a manager, overseeing work performed by trade contractors. The owner typically pays actual costs plus a fee.

Lien Waiver

A legal document signed by a contractor, subcontractor, or supplier stating they have received payment and waive the right to file a lien against the property for that amount. It protects the project owner from future claims once payment is made.

Payroll Compliances

Certified Payroll Reports

Certified payroll reports are required on publicly funded construction projects and increasingly on some private projects due to changing laws (such as in California). These reports confirm compliance with prevailing wage requirements and include:

• Employee names and addresses
• Social Security numbers
• Hours worked (regular and overtime) by day
• Hourly wage rates
• Deductions and net pay
• Fringe benefits paid
• A signed Statement of Compliance

Prevailing Wage

Prevailing wage is the minimum hourly rate, including benefits, that contractors must pay workers on government-funded projects under the Davis-Bacon Act, the federal law that sets this requirement. Many states and counties also have their own prevailing wage laws. These rates vary by location and job type and must be included in bids and payroll records.

Ready to Turn These Concepts into Action?

Understanding terms like job cost systems, certified payroll reports, and key financial documents is just the first step. At Onware Inc., we help construction companies unlock their data from platforms like Viewpoint, CMiC, eCMS, and UKG to create powerful BI dashboards and reports.

Want to see how we can simplify your reporting and improve decision-making?

Schedule a discovery call today and start transforming your construction accounting data into insights.