Construction Accounting That Reveals Problems Early: Job Costing, Change Orders, and WIP Reporting

Posted on September 25, 2026

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.

For example, 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. 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 underbilling, 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.

For more personalized guidance, please feel free to reach out to your trusted TBC advisor. They 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.

Energy Efficient Incentives for New Construction and Renovation

The Inflation Reduction Act of 2022 (IRA) updated and reinstated several notable credits and deductions related to Solar and Energy efficiency. Construction of new residential or commercial structures are ideal candidates for these tax savings but they do not preclude existing structures being renovated. Below are a few notable tax considerations.

179D Deduction

179D is an option to accelerate the cost recovery of a commercial building, provided it satisfies certain energy efficiency standards, and is certified by a qualified third party. The deduction applies to owners or lessees of commercial buildings who make energy efficient improvements to building envelopes, interior lighting, and HVAC systems. For 2022, the deduction is $ per square foot (up to $ per square foot if prevailing wages were paid), not to exceed the total amount of deductions taken for the three years prior to energy certification. The IRA has increased the amount of the 179D deduction up to between $ to $ ft. – based on a sliding scale of eligibility contingent on the level of energy savings and whether prevailing wages were paid. To claim the maximum deduction, the project must meet the prevailing wage requirement and have at least a 50% reduction in annual energy costs, compared to the listed standards. As of the time of this writing the prevailing wage requirements have not yet been officially published. The IRA also allows for a deduction reset, and can now be taken every three years provided additional energy efficient improvements were made. Note that the depreciable basis of the building needs to be reduced by the amount of 179D deduction claimed.

45L Tax Credit

The 45L tax credit, also known as the “Energy Efficient Homes Credit” is a credit available to contractors on buildings meeting certain energy efficient standards sold or leased after December 31, 2005. For 2022, residential buildings three stories or less are eligible for a credit of up to $2,000 per dwelling unit. For 2023-2032, all residential buildings are eligible, provided they meet the energy saving standards, for a credit of $500-$5,000 depending on the level of energy efficiency and type of structure. The credit also applies to buildings that have undergone significant rehabilitation. To claim this credit, an energy analysis must be performed by a certified third party.

As these credits require specific parameters it is prudent to contact your TBC tax advisor for further information on whether these credits or other opportunities are available to you or your business.

By: Heather Mallette, CPA, Supervisor

Real Estate and the Current Local Economy

Real estate in the Capital Region is booming, rental prices are increasing and homes are selling at record highs. The local market inventory levels are still low which is resulting in local homes and apartments seeing an increase in value. Depending on your living situation it may be a great opportunity to take advantage of the skyrocketing market. Selling your home in the current environment could see a nice profit for you that may end up being tax free if your gain is below the allowed limits (more on this below). Those gains could go a long way towards a new home or to pay for rent if you want to wait for the market to cool down a bit.

Rising costs have yet to stabilize for Homebuilders which is causing them to have to pass these increases on to the consumers, thus increasing the cost of building a new home. It has also slowed the production as these cost increases are due to a shortage of needed supplies. If you are planning to build your new home, you will want to plan for these increased costs and the time delays in advance. This can help you be more confident that you will have the house construction completed and all costs covered by the date that you were looking to move in.

There are a few things to keep in mind when selling your home. The IRS allows you to exclude a gain from your taxes when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 for single filers and $500,000 if married filing jointly), you must meet the Eligibility test. If you owned your home for a least 2 years of the previous 5 years leading up to the date of sale, you meet the ownership requirement and qualify for the exclusion. However, if you already sold a home in the past 24-month leading up to the sale of your current home you may be ineligible to exclude the gain on your current home from your taxes.

If you have any questions, or would like to discuss your specific situation, please contact your trusted TBC advisor.

By: Scott A. Kind, CPA, Shareholder

NYS Construction Wages Theft Law and What You Need to Know

The construction wages theft law, which takes effect on January 4th, 2022, is legislation which puts the “contractor”, meaning the construction manager, general or prime contractor, liable for unpaid wages owed to a worker by any subcontractor on any level of the project. This legislation is not just something for public work; it encompasses private work, as well. Under this new law the contractor is liable for up to three years for this liability.

The law does not allow an employee or subcontractor to sign an agreement or release to waive the contractor’s liability, except under a collective bargaining agreement made by a bona fide building and construction trade labor union.

This is a hot topic, trending in all the construction related associations that TBC sits on boards of and works with. It has both the general contractors and subcontractors taking notes. Along with COVID-19 administrative duties, supply chain issues, and labor shortages, this is one more task for business owners to keep on their minds. Subcontractors should expect to see extra information requested from contractors, such as certified payrolls and/or certification that all workers are paid. Contracts could contain robust indemnification clauses and/or require payment bonds.

Sides that oppose the new bill feel that the extra procedures could cause payment delays and the cost of projects to increase. In addition, possible problems insuring projects, along with putting a high level of risk on contractors. Sides that back the bill believe that it’s a big win for the working class, with the hope it will eliminate wage theft and create greater oversight on construction sites and safer working environments. United fronts know the importance of protecting the members of the labor force, opposition is more focused on whether this is the right way to do it and who should be liable. Please contact your trusted TBC Advisor for more information.

By: Rob L. Kind, CPA, Co-Managing Shareholder