When it comes to managing finances in the construction industry, traditional accounting simply doesn’t cut it. Project-based work, long timelines, and complex tax rules require specialized knowledge. For any construction CFO, choosing the right accounting method is essential for staying compliant, improving cash flow, and maximizing profitability.
Below is a breakdown of the most common construction accounting methods, their pros and cons, and what each means for your taxes.
1. Cash Basis Accounting
Overview: Revenue and expenses are recorded only when cash is received or paid.
Pros:
- Simple to use
- Provides a clear picture of cash on hand
- Offers some flexibility in tax planning
Cons:
- Doesn’t match revenue to expenses
- Can misrepresent profitability on long-term projects
- Not permitted for construction companies with over ~$29M in average annual revenue
Tax Implications:
- Generally available to small contractors only
- May delay income recognition, but also delay expense deductions
- Not permitted for long-term contracts over IRS thresholds
A construction CFO can help determine if your business qualifies for this method and whether the cash basis aligns with your strategic goals.
2. Accrual Basis Accounting
Overview: Revenue is recognized when earned, and expenses when incurred—regardless of cash flow.
Pros:
- Provides a more accurate financial picture
- Aligns income with expenses
- Helps with long-term financial planning
Cons:
- More complex
- May lead to taxes owed on income not yet collected
- Overbillings can inflate revenue
Tax Implications:
- Required for contractors above certain revenue thresholds
- Can accelerate tax liabilities compared to cash method
Most experienced construction CFOs recommend accrual-based accounting for growing firms that need visibility across projects.
3. Completed Contract Method (CCM)
Overview: Income and expenses are only recorded once the project is completed.
Pros:
- Defers taxes until the job is done
- Easy to calculate profit at project completion
Cons:
- Revenue may pile up all in one year, leading to large tax bills
- Doesn’t provide an ongoing view of profitability
Tax Implications:
- Limited to small contractors or jobs completed within two years
- May lead to “income bunching” when several jobs close at once
A construction CFO can help you determine if CCM is a smart deferral strategy or a risk to predictable cash flow.
4. Percentage of Completion Method (PCM)
Overview: Recognizes revenue based on the percentage of costs incurred to date vs. total estimated project costs.
Pros:
- Provides real-time view of project profitability
- Required for many long-term construction contracts
- Matches revenue with work completed
Cons:
- Requires accurate forecasting
- Increases administrative effort
- Taxes may be due before cash is received
Tax Implications:
- Mandated by the IRS for most long-term contracts
- May trigger look-back provisions for prior-year adjustments
Any qualified construction CFO should be well-versed in PCM and its impact on both job costing and tax obligations.
5. Hybrid and Specialized Methods
Overview: Some contractors use a combination of accounting methods tailored to different parts of their business.
Examples:
- PCM for long-term contracts
- Cash basis for smaller jobs or service work
Tax Implications:
- Must follow IRS rules for method use and changes
- Can offer flexibility if managed properly
Why the Right Accounting Method Matters
| Method | Best For | Watch Out For |
|---|---|---|
| Cash Basis | Small contractors | Inaccurate profit tracking |
| Accrual Basis | Larger contractors | Tax on unpaid revenue |
| Completed Contract | Short-term projects | Bunched income and delayed insight |
| Percentage Completion | Long-term projects | Complex forecasting, early tax obligations |
| Hybrid Methods | Diverse project portfolios | Requires strong oversight and compliance |
How a Construction CFO Can Help
Choosing and managing the right accounting method isn’t just a finance function—it’s a strategic decision. A skilled construction CFO brings deep expertise in construction-specific tax laws, financial reporting, and project cash flow planning.
A construction CFO can:
- Evaluate your current accounting method and suggest better alternatives
- Ensure IRS compliance and avoid penalties
- Improve job cost visibility and financial forecasting
- Coordinate method changes using IRS Form 3115 when needed
By working with a construction CFO, you’ll be better positioned to protect margins, reduce audit risk, and plan more confidently for growth.
Need help choosing the right construction accounting method? Work with a Construction CFO to ensure you’re on the right track for profitability and compliance.
