Accounting for construction companies is ordinary bookkeeping with four extra layers bolted on: the Construction Industry Scheme, the VAT domestic reverse charge, retentions and job-by-job costing. Get those four right, keep a cash flow forecast you actually look at, and most of the rest falls into place. Get them wrong and you can post a decent profit on paper while the bank account tells a very different story.
This guide covers what makes construction company accounting different from the textbook version, what a well-run set of books looks like in a building firm of five to fifty people, and the point where a general bookkeeper or accountant stops being enough.
Why accounting for construction companies is different
A shop sells something, takes the money and the sale is done. A building contractor does work for weeks, submits an application for payment, waits for the QS to value it (usually for less than you applied for), has a retention held back, gets paid net of tax the main contractor has already deducted, and may not know whether the job made money until the final account is agreed months later.
That gap between the work, the invoice, the cash and the true profit is the whole problem. Generic bookkeeping treats all four as the same moment. Construction books have to keep them apart.
CIS: you are often on both sides of it
Most construction firms of any size are a contractor and a subcontractor at the same time. You get deductions taken from your own payments by the main contractor, and you deduct from the subbies you pay.
When you pay subcontractors
You verify each subbie with HMRC before paying them, then deduct 20% for registered subbies, 30% for unregistered ones, or nothing for those with gross payment status. The deduction comes off the labour element only, after taking out VAT and materials the subbie bought. Your monthly return is due by the 19th, the money by the 22nd if you pay electronically, and each subbie gets a payment and deduction statement within 14 days of the end of the tax month (the tax month runs to the 5th).
Since 6 April 2026 you also have to file a nil return for any month you paid no subbies, unless you told HMRC in advance you were inactive. The old penalty regime is back: £100 for a return one day late, rising from there.
When you are paid under CIS
Record the full gross invoice as your sale and the deduction as tax already paid. A limited company gets that money back by setting it against its PAYE bill through the Employer Payment Summary; a sole trader gets credit through Self Assessment. Book only the net cash as income and your turnover, profit and tax position are all wrong.
Read our full guide to getting CIS deductions right →
VAT and the domestic reverse charge
Since 1 March 2021, most building work supplied between VAT-registered businesses within CIS is invoiced without VAT. The customer accounts for the VAT on their own return instead. It applies to standard and reduced-rated work, and it does not apply where the customer has told you in writing that they are an end user or intermediary supplier (a developer or client who is not passing the work on, for example).
For the books, that means your sales ledger has three kinds of invoice: normal VAT, reverse charge and zero-rated (new-build housing, for instance). Each goes in a different box on the VAT return. The common result for a subbie working mainly for main contractors is a VAT return that is regularly a repayment, which is fine, but only if the invoices carry the right wording and the coding is correct. See our plain-English guide to the reverse charge →
Job costing is where construction company accounting earns its keep
If every cost in your books goes to one big "cost of sales" heading, you know how the company did overall and nothing about which jobs paid for which. Code each invoice, each timesheet and each subbie payment to a job number and you can compare actual cost against the estimate while there is still time to act.
Example: one job, two pictures
A £100,000 refurbishment contract, halfway through. Costs to date are £50,000.
| £ | |
|---|---|
| Applied for to date | 60,000 |
| Valued by the QS | 55,000 |
| Less 5% retention | (2,750) |
| Cash actually received | 52,250 |
On paper the job has earned £55,000 against £50,000 of cost. In the bank it is £2,250 ahead, before you have paid any overhead. Both numbers matter, and a set of books that only shows one of them will mislead you.
Retentions and stage payments
Retentions are money you have earned but will not see until practical completion, and the rest not until the end of the defects period. They are easy to forget because nobody sends you a reminder. Keep a simple retentions ledger: job, amount, the dates each half is due, and who to chase. Stage payments work the other way; agree them up front so you are not funding the whole job from your own overdraft. How to stop retentions draining your cash flow →
Work in progress and when profit is really earned
At the year end, and ideally every month, part-finished jobs need valuing properly. Costs incurred on a job you have not yet invoiced are not a loss, and an application that the QS will cut is not all profit. How you treat work in progress can move your reported profit, and your corporation tax, by a surprising amount. It is worth agreeing a consistent method with your accountant rather than letting it be decided in a rush at year end.
Cash flow is the real scoreboard
Construction firms rarely fail because the work was unprofitable. They fail because the cash ran out between the wages going out on Friday and the main contractor paying 45 days later. A rolling 13-week forecast that shows wages, subbie payments, the CIS and VAT dates, the van on HP and the money you expect in (realistically, not what the contract says) is the single most useful report in the business. Put a percentage of every receipt aside for VAT and corporation tax into a separate account and the quarter-end stops being a shock. Build a 13-week cash flow forecast →
What good looks like in practice
A well-run set of construction books is not complicated. It is just kept up to date. In a typical month that means:
- The bank reconciled at least weekly, so the balance on screen is the balance in the bank.
- Every purchase invoice and timesheet coded to a job before it is paid.
- Subbies verified before their first payment, and the CIS return filed by the 19th.
- Sales invoices raised with the right VAT treatment, and deduction statements from main contractors matched to what was paid.
- A retentions list that someone actually checks.
- A short job report comparing cost to estimate, and an updated cash forecast.
None of that needs expensive software. It needs discipline and someone who understands why each piece matters.
When to bring in a specialist
If your accountant only appears once a year to do the accounts and the tax return, you are missing most of the value. Signs you need someone who knows construction: your CIS deductions are not being reclaimed promptly, VAT returns keep being corrected, you cannot tell which jobs made money, or you only find out how the year went nine months after it ended. Those are all fixable, and fixing them usually pays for itself in cash released and mistakes avoided.
Frequently asked questions
What is different about accounting for construction companies?
Construction firms deal with CIS deductions, the VAT domestic reverse charge, retentions and job-by-job costing, none of which a standard business faces. The gap between doing the work, invoicing it and being paid also makes cash flow harder to manage.
Do construction companies record CIS income gross or net?
Gross. The full invoice value is your sale, and the deduction taken by the contractor is recorded as tax already paid that you can reclaim or set against your bill.
Does the reverse charge apply to all construction work?
No. It applies to standard and reduced-rated work reported under CIS between VAT-registered businesses, and not where the customer has confirmed in writing that they are an end user or intermediary supplier.
How often should a building firm reconcile its books?
Weekly for the bank and monthly for jobs, CIS and the cash forecast is a sensible rhythm. Leaving it until the VAT quarter or year end means problems are found too late to fix cheaply.
Want your construction books doing more for you?
Book a free, no-obligation discovery call with Patrick. We'll look at how your CIS, VAT and job costing are set up and tell you plainly what we'd change.
Schedule a CallThis article is general guidance for building contractors, not advice for your specific situation. Always review your own circumstances with your accountant before acting.
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