TLDR: Choosing the right construction accounting method affects far more than taxes. It impacts cash flow, financial reporting, and even your ability to qualify for larger projects through bonding. Donovan CPAs helps Indiana contractors evaluate the tradeoffs and select an accounting method that supports both compliance and long-term growth.
At a Glance:
- Your accounting method determines when income is recognized, which directly affects taxes, cash flow, and financial reporting. The right choice depends on your gross receipts, contract types, and business goals.
- IRS rules may limit your options. Contractors working on long-term projects often must use the percentage of completion method unless they qualify for an exemption based on factors like gross receipts.
- Bonding capacity depends on more than profitability. Sureties rely on detailed financial statements and work-in-progress schedules, making your accounting method an important factor in securing larger projects.
- Donovan CPAs works with Indiana contractors to navigate accounting method selection, job costing, tax planning, and bonding support so financial decisions align with both current operations and future growth.
The accounting method your construction company runs on is not a back-office detail you can leave to whoever handles the books. It determines when you owe tax, how cash moves through a project, and what your surety and your bank see when they size up your financial health.
Two factors drive the decision: the size of your company, measured by average gross receipts, and the type of contracts you sign. Sometimes you get to pick. Other times, the IRS picks for you.
This guide walks through the four Indiana construction accounting methods available to contractors, the gross receipts rule that can force a switch, and how the method you land on shapes your bonding capacity.
Every contractor’s situation looks a little different, so treat this as the starting point for a conversation with your CPA, not the final word.
The Four Construction Accounting Methods at a Glance
Method | How Income is Recognized | Best for |
Cash | When payment is received | Smaller contractors focused on simplicity and tax deferral |
Accrual | When earned, regardless of cash | A more accurate financial picture within a given project period |
Completed-Contract (CCM) | All at once, when the job wraps | Smaller contractors seeking maximum tax deferral |
Percentage of Completion Method (PCM) | As the work progresses | Larger contractors and surety-facing financials |
Cash Method
For the cash method, income is recorded when payment lands and expenses when they’re paid out, regardless of when the work actually happened.
It’s the simplest of the four and can defer tax, since revenue isn’t counted until the cash is in hand. Whether you can use it generally depends on your gross receipts and your entity type.
Accrual Method
For the accrual method, income is recorded when it’s earned and expenses when they’re incurred, not when money actually changes hands.
This gives a clearer read on how a specific project period performed, though it can mean paying tax on revenue you’ve billed but haven’t yet collected.
Completed-Contract Method (CCM)
For the completed-contract method, income and expenses for a contract get recognized in one lump, when the job is finished.
It’s the most conservative approach to tax timing, since it pushes income recognition out as far as possible, but it’s generally limited to contractors under the gross receipts threshold and can make year-to-year income look uneven.
Percentage of Completion Method
For the percentage of completion method, income and expenses are recognized as work progresses, based on how much of the job is actually done. Larger contractors are generally required to use this method for long-term contracts.
It smooths income across the life of a project and produces the kind of financial statements sureties want to see, but it only works as well as your job cost tracking does.
Why the Method Isn’t Always Your Choice (IRC Section 460)
A long-term contract, for tax purposes, is any contract you don’t complete in the same tax year you started it. It’s important to know that the calendar matters more than the duration.
For example, a project that kicks off in late December and wraps in early January counts as long-term, even though the actual work only took a few weeks.
Under IRC Section 460, contractors are generally required to use the percentage of completion method for long-term contracts unless an exception applies. The two most common exceptions are the small-contractor exception, tied to gross receipts, and an exemption for home construction or residential contracts.
These rules turn on specific facts, so confirm how they apply to your business with your CPA before assuming either exception covers you.
The Small Contractor Exemption Threshold and the Gross Receipts Test
The small-contractor exception runs through the gross receipts test under IRC Section 448(c). That test looks at your average annual gross receipts across the three prior tax years.
If that three-year average sits at or below the inflation-adjusted threshold, you generally aren’t forced onto percentage of completion and may be able to use an exempt method, such as completed-contract, instead.
The small contractor exemption threshold moves every year because it’s adjusted for inflation. For the 2026 tax year, it’s set at $32 million, based on the average of your 2023, 2024, and 2025 gross receipts. Because this number changes annually, always confirm the current-year figure.
Contractors sitting close to that line should keep an eye on it. A single large project or the sale of a major asset can push your three-year average over the threshold, forcing a switch to percentage of completion and potentially accelerating taxable income at an inconvenient moment.
Short tax years get annualized for the test, and related companies may be required to combine receipts under aggregation rules, so the actual calculation isn’t always as simple as looking at one company’s revenue in isolation.
How Percentage of Completion Actually Works
The most common way contractors calculate percentage of completion is the cost-to-cost method. You divide the costs incurred to date by the total costs estimated for the entire job, then apply that percentage to the contract price to determine how much revenue to recognize for the period.
This method is only as reliable as your job costing. When cost tracking is loose or inconsistent, the resulting percentages are unreliable too, and the financial picture built on top of them stops reflecting reality.
There’s also a look-back component to account for. When original cost estimates end up off from actual results, the IRS may charge or refund interest after the contract closes, calculated on Form 8697. Tighter estimating up front reduces that exposure.
Because the details vary by contract, it’s worth reviewing yours with your CPA rather than assuming a standard outcome.
What Your Accounting Method Means for Bonding and Surety
Your accounting method shapes more than your tax bill. It shapes the financial statements your surety and your bank rely on to decide how much bonding capacity you’re worth, and that number determines whether you can even bid for the next job.
A surety underwriter isn’t reading your financials the way the IRS does. They want to know if the company can absorb a job going sideways without the surety having to step in and finish it.
Percentage of completion is built to answer that question. It produces work-in-progress (WIP) schedules that show, contract by contract, how much has been billed against how much work is actually done.
That over- and under-billing detail is what underwriters look for first. Over-billing across several jobs can mean a cash flow problem that hasn’t hit the income statement yet. Under-billing can simply mean slow invoicing, or it can mean jobs are running behind.
This is where tax planning and bonding pull in opposite directions. Completed-contract and cash-basis reporting defer tax well, but they don’t generate WIP detail, and they can understate a company’s real equity mid-project.
A contractor built around minimizing this year’s tax bill can end up with financials that look thinner than the business actually is, right when they’re trying to qualify for a larger bond. Managing that tradeoff is one of the places a construction accountant genuinely earns their fee.
Good construction accounting services treat the WIP schedule as a living document, updated monthly or quarterly with real job cost data. If bonding capacity drives how your company wins work, your method choice and your job costing discipline deserve as much attention as your tax strategy.
Talk to our construction team if bonding capacity is shaping how you think about your next method decision.
Choosing a Method: What to Work Through with Your CPA
There’s no single right answer that applies to every contractor. The right method for your business depends on a combination of factors your CPA will walk through with you, including:
- Your average gross receipts relative to the current threshold
- The typical length of your contracts
- Your cash flow needs across a project cycle
- Your bonding and surety requirements
- Any GAAP reporting your lenders or partners require
Because these factors interact with each other, and because the underlying tax rules depend on the specifics of your business, this is a decision best made alongside a CPA rather than in isolation.
How Donovan CPAs Helps Indiana Contractors
Donovan CPAs works with commercial, residential, civil, and highway contractors across Indiana. Our construction CPAs specialize in job costing and project accounting, tax planning and compliance, bonding and surety support, and cost segregation studies.
If you’re weighing a method change or preparing financials for a surety, we can help you work through the tradeoffs and land on the approach that fits your business.
As an Indiana construction accounting firm who works with contractors day in and day out, we’ve seen how much a mismatched method can cost a growing company, in tax, in cash flow, and in bonding capacity. If you’re not sure your current method still fits your business, that’s a conversation worth having before your next renewal or your next bid.
Schedule an appointment with our team, or visit our construction industry page for the full list of services we perform to support Indiana contractors.
FAQs
What accounting methods can construction companies use?
Construction companies generally choose among four methods: cash, accrual, completed-contract, and percentage of completion. Cash and accrual govern everyday income and expense recognition. Completed-contract and percentage of completion apply specifically to long-term contracts. Which methods are available to you depends on your gross receipts and the types of contracts you sign. A CPA for construction companies can help you weigh the options against your specific situation.
Is my construction company required to use the percentage of completion method?
In most cases, contractors are required to use percentage of completion for long-term contracts under IRC Section 460. Exceptions apply, most commonly for contractors under the gross receipts threshold and for home construction or residential contracts. Because the rules depend on your specific facts, confirm your situation with a CPA.
What is the small contractor exemption threshold for the current tax year?
The threshold is set under IRC Section 448(c) and adjusts for inflation each year. For the 2026 tax year, it’s $32 million, measured as your average annual gross receipts over the three prior years. If your average sits at or below the threshold, you generally aren’t forced onto percentage of completion.
What is the difference between the completed-contract and percentage of completion methods?
Completed-contract recognizes all income and expenses when a job finishes, which defers tax but can produce uneven income year to year. Percentage of completion recognizes income and expenses as work progresses, which smooths income and produces the financial statements sureties tend to prefer.
How does my accounting method affect my bonding capacity?
Sureties lean on work-in-progress schedules and financial statements to judge your bonding capacity, and percentage of completion produces the kind of detail they look for. A method chosen purely to defer tax may not present as well to a bonding company. Balancing tax timing against surety presentation is a common decision point for growing contractors, and it’s a big part of what CPA construction specialists focus on with bonded clients.
What is look-back interest and when does it apply?
Look-back interest applies to certain long-term contracts accounted for under percentage of completion. When original cost estimates differ from actual results, the IRS may charge or refund interest after the contract closes, calculated on Form 8697. Accurate estimating up front reduces that exposure.
Can a contractor change accounting methods?
In many cases, yes, but a change usually requires IRS consent and is requested on Form 3115. Some changes qualify for automatic consent, while others require advance approval. Because a method change can shift the timing of taxable income, plan it with a construction CPA before filing anything.
Related Links
Trinity Ellis, CPA, is one of Donovan CPAs’ lead construction accountants in Indiana focused specifically on contractors, sureties, and bonding-related reporting, working with construction and contracting clients across the state on tax planning, job costing, and method decisions. View Trinity’s full bio.
