Profitable projects, empty bank account
The defining characteristic of a construction business is that it pays before it is paid. Materials are bought, subcontractors invoice, and payroll runs — all before the work is certified, and certification is itself weeks before payment.
Add retention, typically held until well after practical completion, and a contractor with a healthy order book and reasonable margins can be permanently short of cash. That is not a failure of the business; it is the structure of the industry, and the businesses that fail in it usually fail on cash rather than on profitability.
Which means construction accounting has two jobs. It has to report project profitability accurately — which requires proper revenue recognition, not billing-based accounting — and it has to forecast cash far enough ahead to act. A contractor that has one without the other is running on half the information.
Who needs it
Main contractors, subcontractors across all trades, fit-out and interiors companies, MEP contractors, civil and infrastructure businesses, and specialist trade contractors.
Particularly businesses running several projects concurrently, where blended results conceal which project is actually making money, and businesses whose growth is being funded from working capital without anybody having modelled it.
How we do it
Every engagement is different in detail, but the shape is consistent:
- Set revenue recognition on stage of completion, not on invoicing — recognising work performed and certified but not yet billed.
- Track costs by project, with a coding discipline applied at the point of entry rather than allocated afterwards.
- Account for retention as a receivable when earned rather than ignoring it until release, on both the customer and subcontractor sides.
- Record variations as they are instructed, including those agreed verbally, because an unrecorded variation is unbilled work.
- Provide for loss-making contracts in full as soon as the loss is foreseeable, rather than spreading it across the remaining stages.
- Build the thirteen-week cash forecast, which for a contractor is not optional management information.
- Handle VAT on advances, milestones and retention, where the tax point is frequently misunderstood.
- Report project profitability monthly, so a project going wrong is visible while there is still something to be done about it.
Revenue recognition, and why billing-based accounting misleads
A contractor accounting on the basis of what it has invoiced will produce results that swing with the billing cycle rather than with performance:
- Recognise on stage of completion — the proportion of work performed, measured on a defensible basis such as costs incurred against total expected costs
- Work certified but not invoiced is revenue earned and belongs in the accounts as accrued income
- Advance payments received are a liability until the related work is performed, not revenue
- Retention is revenue earned and receivable, held back but not lost
- Variations are recognised when it is probable they will be approved and the amount can be measured
- Foreseeable losses are provided for in full immediately, not spread across remaining stages
The last point is the one businesses resist most. A project identified as loss-making must take the whole expected loss now, which makes the current period look worse than the cash position suggests. Deferring it does not reduce the loss — it moves it into a period where it will be more surprising.
VAT tax points on construction contracts
Construction VAT errors cluster around the timing of the tax point, and the amounts are usually large enough to matter.
Advance payments generally create a tax point on receipt, meaning output tax is due before the work is performed. Milestone and progress payments create tax points on certification or payment depending on the contract terms, which is why the contract terms need reading rather than assuming. Retention has its own timing question that contractors frequently get wrong in both directions.
And because construction businesses are often in a net input position — buying materials and paying subcontractors ahead of certification — refund claims are common in this sector. Those claims are examined, so the documentation needs assembling as part of the claim rather than in response to the query it generates.
Bad debt relief is the other recurring item: construction has more unpaid invoices than most sectors, and relief on them is routinely left unclaimed.
Where this goes wrong
The same problems recur, and every one of them was cheaper to prevent:
- Accounting on billing rather than stage of completion, producing results that track invoicing rather than performance.
- Retention ignored until release, understating both revenue and receivables.
- Variations undocumented, so instructed work is never billed and never recovered.
- Advance payments treated as revenue rather than as a liability.
- Foreseeable losses spread rather than provided for in full.
- No project-level cost tracking, so nobody knows which project is carrying which.
- No cash forecast in a sector where cash, not profit, is what businesses fail on.
- Bad debt relief never claimed, in the sector with the most unpaid invoices.
The timing
Project accounting has to run monthly. A construction business closing quarterly cannot see a project going wrong in time to respond, and the response window on a deteriorating contract is short.
The cash forecast is updated weekly. Revenue recognition policy is set at the start of a contract, not at the year end. Corporate tax follows at 30 September 2026 for a December year end, but the useful discipline is a project position that is accurate every month.
Deliverables
- Revenue recognised on stage of completion, by project
- Project profitability reported monthly, not blended
- Retention tracked on both sides
- Variations recorded as instructed rather than as billed
- A thirteen-week cash forecast updated weekly
- VAT returns with correct tax points on advances, milestones and retention
- Bad debt relief claimed where the conditions are met
- Corporate tax return and financial statements
Documents we will ask for
Nothing exotic, and most of it you already have:
- Contracts for each active project, including payment and retention terms
- Cost budgets by project and costs incurred to date
- Certification and valuation records
- Variation instructions, including any agreed verbally
- Retention balances, receivable and payable
- Subcontractor agreements and payment terms
- Aged receivables with certification status
- Bank position and committed payments
Fees
Priced on the number of active projects and transaction volume rather than on revenue, since project count is what drives the work.
The initial setup — project coding structure, revenue recognition policy, retention tracking, cash forecast build — is a fixed-fee project. It is the piece worth doing properly, because everything reported afterwards depends on it.
Related
Frequently Asked Questions
When should construction revenue be recognised?
On stage of completion — the proportion of work actually performed, measured on a defensible basis such as costs incurred against total expected costs. Accounting on what has been invoiced produces results that swing with the billing cycle rather than with performance.
How is retention accounted for?
As revenue earned and a receivable, held back but not lost. Ignoring it until release understates both revenue and receivables, and across several concurrent projects the aggregate is usually material.
What if a project is going to lose money?
The whole expected loss is provided for as soon as it is foreseeable, not spread across the remaining stages. It makes the current period look worse than the cash suggests, and deferring it simply moves the loss into a period where it will be more surprising.
Why are we profitable but always short of cash?
Because construction pays before it is paid: materials, subcontractors and payroll all precede certification, and certification precedes payment. Add retention and the gap widens further. It is the structure of the industry, and it is why a thirteen-week cash forecast is not optional in this sector.
When is VAT due on an advance payment?
Generally on receipt, meaning output tax falls due before the work is performed. Milestone payments create tax points on certification or payment depending on the contract terms — which is why the terms need reading rather than assuming a general rule.
Can we claim VAT back on unpaid invoices?
Bad debt relief allows recovery of VAT already accounted for where the conditions are met — six months elapsed, the debt written off, the customer notified. Construction has more unpaid invoices than most sectors and more unclaimed relief sitting in ledgers as a result.
How does e-invoicing affect contractors?
More than most sectors. Milestone billing, retention, variations and advance payments all have to be represented inside structured invoice data rather than managed in a spreadsheet alongside the accounting system — which is where they currently live in most contracting businesses. It is the heaviest data preparation lift in the mandate.
If the answer is blended across the business, that is the first thing to fix. Project-level reporting is setup work, and everything else depends on it.
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Last reviewed 27 July 2026. Rates, thresholds and deadlines change — the e-invoicing provider deadline has already moved once. Confirm current requirements with the Federal Tax Authority before acting, or ask us to check your position.