Construction is one of the most financially complex industries for bookkeepers in Australia. The combination of long project timelines, progress claim billing, retention withholding, subcontractor management, and variation disputes creates an accounting environment that standard small business approaches do not handle well.
The revenue recognition question
Unlike retail or services businesses where revenue is recognised on sale or delivery, construction revenue recognition depends on the method used and the contract type.
Percentage of completion method: Revenue is recognised in proportion to the stage of completion — typically based on costs incurred as a percentage of total expected costs, or on certified progress claims as a percentage of contract value. This is the most common approach for significant construction contracts.
Completed contract method: Revenue and costs are only recognised when the contract is substantially complete. Used for short-duration or highly uncertain contracts.
Under Australian accounting standards (AASB 15 Revenue from Contracts with Customers), the percentage of completion approach is generally required for contracts where performance obligations are satisfied over time — which is most construction contracts.
Progress claims and retentions
Progress claims are the invoices issued by contractors to clients at agreed milestones (typically monthly or upon completing a stage). Each progress claim covers the work done to date less amounts already claimed.
Retentions are an agreed percentage of each progress claim (commonly 5–10%) that the principal holds back until practical completion and/or defects liability period expiry. Retentions can be held for 12–24 months after practical completion.
Bookkeeping treatment:
- Issue the full progress claim as revenue (or debit accounts receivable for the full amount)
- Post the retention amount to a retentions receivable account (a separate current or non-current asset)
- The bank receipt is the net progress claim amount (full claim less retention)
The retention receivable is an asset that the contractor is owed but cannot collect yet. It must be tracked separately and followed up at the end of the defects liability period.
Work in progress (WIP)
WIP is the accumulated cost of work performed on a contract that has not yet been billed or recognised as revenue. For a construction business, this represents:
- Labour costs incurred on uncertified stages
- Materials consumed on site but not yet claimed
- Subcontractor costs for work done but not yet certified
WIP sits on the balance sheet as an asset until the corresponding revenue is recognised. For businesses using the percentage of completion method, a WIP journal is required at each reporting date.
Common WIP errors:
- Not maintaining WIP journals — all job costs go to P&L as incurred, creating lumpy profitability that does not match physical progress
- Including job costs that should have been billed in the previous period
- Failing to write down WIP on loss-making contracts
Subcontractor payments and Taxable Payments Annual Report (TPAR)
Australian construction businesses that make payments to subcontractors must lodge a Taxable Payments Annual Report (TPAR) each year by 28 August. The TPAR discloses payments to each subcontractor (ABN, name, total paid, GST included).
TPAR applies to:
- Building and construction businesses (regardless of whether they primarily engage subs)
- Cleaning, courier, road freight, IT, and security businesses under a broader TPAR regime
For bookkeepers managing construction clients, collecting subcontractor ABNs at engagement is essential. Subcontractors without an ABN must have 47% withheld under the no-ABN withholding rules.
Variations
Variations are changes to the contract scope that are agreed (or disputed) between the principal and contractor. They affect contract revenue and often contract profitability.
Bookkeeping for approved variations:
- Increase the contract revenue recognised by the variation amount
- Issue a variation claim (separate from the progress claim, or incorporated into it)
- Track approved vs. disputed variations separately
Disputed variations (work done that the principal has not yet approved) create a revenue recognition question: should the contractor recognise revenue for disputed work? Under AASB 15, it can be recognised only if it is highly probable the amount will not be reversed. Conservative practice is to carry disputed variation work as WIP until approved.
Domestic Building Contracts and the Security of Payment Acts
Each state has security of payment legislation (e.g., Building and Construction Industry Security of Payment Act in NSW, VIC, QLD) that gives contractors the right to adjudicate payment disputes quickly. For bookkeepers with construction clients, understanding that disputed payment claims can be resolved through adjudication — faster than court — is useful context when a large debtors balance is ageing.
Practical setup for a construction bookkeeper
Chart of accounts additions:
- Retentions receivable (separate from trade debtors)
- Retentions payable (amounts held back from subcontractors)
- Work in progress (asset)
- Progress billings (contra-asset, offset against WIP)
- Contract revenue (by job code)
- Contract costs (by cost type within each job code)
Job costing system: essential for any construction business with more than 2–3 concurrent projects. Most accounting platforms (Xero Projects, MYOB Jobs) support basic job costing. For complex businesses, a dedicated construction management platform (Procore, Buildxact, Simpro) may be needed.