Published: November 202
Construction and trades businesses fail at nearly twice the rate of other Australian industries, with inadequate financial management cited as the primary cause in 68% of failures according to Australian Securities and Investments Commission data. Unlike retail or professional services, construction bookkeeping involves unique challenges: job costing, progress billing, retention money, subcontractor compliance, and complex cash flow timing that can bankrupt profitable businesses.
This comprehensive guide explains how to manage bookkeeping for trades and construction businesses in Australia, covering industry-specific requirements, worked examples, and the compliance traps that cost businesses thousands in penalties.
The standard chart of accounts used by retail or service businesses does not work well for construction. You need accounts that track costs and revenue by project while maintaining overall business profitability.
Construction revenue should be split by work type, not just recorded as general income:
This split allows you to analyse which types of work are most profitable and where to focus business development efforts.
Direct costs are expenses directly attributable to specific jobs:
Labour Costs
Materials
Equipment and Plant
Site Costs
Expenses that support the business but cannot be attributed to specific jobs:
Special balance sheet accounts track projects spanning multiple periods:
These accounts are critical for accurate profit reporting and will be explained in detail in the job costing section.
Job costing tracks all revenue and costs for each specific project, allowing you to determine profitability per job rather than just overall business profitability.
A construction business can appear profitable overall while losing money on half its projects. Without job costing, you cannot identify which job types, clients, or project sizes deliver profit.
Example: A Melbourne renovation company with $2.4 million annual revenue showed $180,000 net profit. Job costing revealed:
The business was winning large whole-house renovation contracts that looked good but barely covered costs. By raising prices on this work by 15% and focusing on kitchen, bathroom, and maintenance work, gross profit increased to 24% overall, adding $196,000 to the bottom line without increasing revenue.
Modern accounting software like Xero Projects, MYOB AccountEdge, and specialized construction software like Tradify or AroFlo includes job costing features.
For each project, create a job record including:
Every expense and revenue transaction then gets coded to the specific job in addition to the chart of accounts category.
- Direct Costs: (materials, site labour, equipment hire) are allocated 100% to the job that incurred them. This is straightforward: the supplier invoice for timber for Job 2024-045 gets coded to Materials - Timber and Job 2024-045.
- Indirect Costs: (administration, vehicles, insurance) require allocation across all active jobs. Common allocation methods include:
- Percentage of Revenue: If Job A represents 35% of monthly revenue, allocate 35% of monthly overheads to Job A.
- Labour Hours: If Job A consumed 40% of total labour hours this month, allocate 40% of overheads.
- Square Metres: For residential builders, allocating overheads per square metre of floor area under construction works well.
Choose one method and apply it consistently. The method matters less than consistency, which allows you to compare job profitability accurately.
A Brisbane renovation company quotes a $150,000 bathroom and kitchen renovation. The job costing tracks:
Revenue
Direct Costs
Allocated Overheads (20% of direct costs): $20,910
Total Job Cost: $125,460
Job Gross Profit: $36,240 (22.4% margin)
The job delivered acceptable profitability. However, if direct costs had been $115,000 (10% over budget due to material price increases or rework), the gross profit would have dropped to $23,600 (14.6% margin), turning an acceptable job into a poor performer.
Construction projects spanning several months involve progress billing, where you invoice for completed work before the project finishes.
A typical commercial construction contract might structure progress payments as:
Each progress claim creates accounts receivable:
Example: On a $400,000 commercial fitout:
Month 1 - Deposit invoice:
Month 2 - First progress claim (foundation complete):
Costs incurred are recorded as they occur:
Month 1 costs:
Month 2 costs:
Many commercial and government contracts withhold 5-10% of each progress payment as retention, released only after final completion and defect rectification (typically 3-12 months after practical completion).
Example: $80,000 progress claim with 5% retention:
Record this as:
The retention receivable sits on your balance sheet as an asset until released.
New South Wales, Victoria, and Queensland now require retention money to be held in trust accounts for projects above certain thresholds (typically $20 million in NSW, $1 million in Queensland for certain project types).
As a subcontractor, if you hold retention money from head contractors on qualifying projects, you must:
Failing to establish required trust accounts results in penalties of $22,000 for individuals and $110,000 for companies in NSW. Most small to medium subcontractors are not affected by these thresholds, but check your state's requirements.
Construction businesses face unique cash flow challenges that make cash flow management more critical than in other industries.
A typical construction cash flow cycle works as follows:
- Day 1: Win contract for $200,000 project expected to take 12 weeks.
- Week 1: Order $40,000 in materials. Supplier terms are 30 days.
- Week 2: Materials delivered. $18,000 in labour costs incurred.
- Week 4: First progress claim invoiced for $60,000. Client payment terms are 30 days.
- Week 5: Supplier invoice for $40,000 now due and paid.
- Week 6: Another $25,000 in materials ordered and delivered.
- Week 8: First progress claim payment of $60,000 finally received (4 weeks after invoice).
- Week 9: Second progress claim for $70,000 invoiced.
- Week 10: Second supplier invoice for $25,000 now due and paid.
Notice the cash flow problem: You pay suppliers in 30 days but get paid by clients in 30 days from invoicing, which might happen only at specific project milestones. You are funding the gap with working capital.
For a business running 6-8 projects simultaneously, the working capital requirement can exceed $150,000-$200,000 even though the business is profitable.
Construction businesses must forecast cash flow weekly, not monthly:
Week Beginning 15 January
Projected Income:
Projected Outgoings:
Projected shortfall: $21,500
This projection made three weeks in advance allows you to:
Many construction businesses maintain a line of credit (typically $50,000-$150,000) specifically to smooth these temporary cash flow gaps that arise from the timing mismatch between paying suppliers and receiving client payments.
Require deposits sufficient to cover your initial material and labour costs. A 10% deposit on a $200,000 project ($20,000) might not cover the first $40,000 in materials you must purchase.
Better practice for small to medium projects is to structure payments as:
This ensures you are never funding more than 10-15% of the project value from working capital.
GST treatment in construction involves several traps that catch many businesses.
When you receive a deposit, GST is due in the BAS period you receive it, not when you complete the work. This creates a cash flow consideration.
Example: You receive a $40,000 deposit in June for work that will not be completed until September.
The GST is due before you have incurred costs or completed work, so the entire deposit flows out in GST and materials, leaving no cash for your business until the next progress payment.
Most construction businesses should use accrual accounting rather than cash accounting, even though cash accounting seems simpler.
Under cash accounting, income and expenses are recorded when cash changes hands. Under accrual accounting, they are recorded when invoiced (income) or when you receive the invoice (expenses).
For construction, cash accounting causes problems:
- December: You complete $120,000 of work and invoice it.
- January: You receive payment of $120,000.
Under cash accounting, this $120,000 income appears in January, not December. If December and January are in different financial years, your profit reporting is wrong for both years.
Worse, progress claims invoiced but not yet paid do not show as income under cash accounting, making your monthly profit reports meaningless.
The ATO requires accrual accounting for businesses with turnover over $10 million, but construction businesses should use accrual accounting from day one to get accurate job costing.
Some construction work involves a mix of GST-free and taxable supplies, though this is uncommon. Most construction work is fully taxable at 10% GST.
Specific scenarios to be aware of:
- New residential construction (building a new home): The sale of a new residential premises is taxable, but if sold as part of a going concern (rare for trades businesses), it can be GST-free.
- Medical and healthcare construction: Certain construction work directly related to medical equipment or healthcare can have different GST treatment.
- Exported services: Construction work performed overseas can be GST-free.
For the vast majority of Australian construction businesses, all work is taxable at 10% GST, so this complexity does not apply.
The Taxable Payments Annual Report (TPAR) is one of the most important compliance requirements for construction businesses.
Any business in the building and construction industry that pays contractors must lodge a TPAR with the ATO by 28 August each year, reporting all payments made to contractors during the previous financial year.
This includes payments to:
TPAR helps the ATO identify contractors who may not be reporting their full income.
You must lodge TPAR if:
This applies even if construction is not your only activity. For example, a plumbing business that does plumbing (construction) and also sells retail plumbing supplies must lodge TPAR.
For each contractor paid $10,000 or more during the financial year, report:
Payments under $10,000 per contractor do not need to be reported individually, though you must report the total number of such contractors and total amounts paid.
Failing to lodge TPAR by 28 August results in a penalty of $6,264 as of 2025, increased from previous years. This penalty applies even if you lodge the report late, not just for failing to lodge at all.
If you make a false or misleading statement in your TPAR (such as reporting incorrect ABNs or amounts), penalties can reach $12,600.
Before paying any contractor, verify their ABN using the ABN Lookup service at abr.gov.au. If a contractor provides an invalid ABN, you must withhold 47% of the payment and remit it to the ATO.
Keep records of:
These records must be kept for five years and may be requested during an ATO audit.
Generally, contractors are responsible for their own superannuation. However, you must pay superannuation for contractors who are:
If these factors apply, the person is more likely an employee, even if you call them a contractor. This is the "sham contracting" trap. Misclassifying employees as contractors to avoid superannuation and other obligations results in penalties, back payment of super, and Superannuation Guarantee Charge.
When in doubt, get advice on whether the arrangement is genuine contracting or actually employment.
Construction and trades businesses can claim deductions many businesses miss:
Tools costing less than $300 can be claimed immediately. Tools costing more than $300 are depreciated over their effective life:
The instant asset write-off allows businesses with turnover under $50 million to immediately deduct assets costing less than $20,000 (as of 1 July 2025, though this threshold changes). This applies to each asset individually, so you can claim:
Trades businesses using vehicles for site work can claim:
- Logbook Method: Keep a 12-week logbook showing business vs private use. Claim that percentage of all vehicle costs (fuel, registration, insurance, repairs, depreciation).
- Cents per Kilometre: Claim up to 5,000 km per year at $0.88 per km (2024-25 rate). No logbook required but must be able to show the kilometres were for business.
For most trades businesses with significant vehicle use, logbook method delivers higher deductions.
Claim training costs related to current work:
You cannot claim training for new skills unrelated to current work, such as an electrician doing a carpentry course.
Claim protective clothing and uniforms:
You cannot claim everyday clothing even if you only wear it to work. The jeans and t-shirt you wear on site are not deductible, but the hi-vis vest over them is.
If you run the business from home and have a dedicated office area, claim:
Many tradies miss this deduction because they think having a workshop or yard means they cannot claim home office. If you do administration, quoting, and scheduling from home, you can claim both the workshop and home office costs.
Businesses using diesel fuel in vehicles or equipment not travelling on public roads can claim diesel fuel tax credits of $0.479 per litre (2024-25 rate).
This applies to:
Record litres consumed separately for on-road (no credit) vs off-road (credit allowed) diesel use.
Construction businesses need more sophisticated software than general bookkeeping packages.
Xero Projects ($60/month plus Xero subscription $40/month = $100/month total)
Tradify ($79/month)
ServiceM8 ($49/month plus Xero $40/month = $89/month total)
AroFlo ($145/month)
MYOB AccountEdge ($65/month)
Whatever software you choose, it must handle:
- Job Costing: Track revenue and costs by project with real-time profitability reporting.
- Progress Billing: Create invoices for percentage completion or based on milestones.
- Retention Tracking: Record retention amounts separately from standard receivables.
- TPAR Reporting: Extract contractor payment data in the format required for TPAR lodgement.
- Materials Tracking: Some projects require tracking materials purchased, used, and remaining.
- Subcontractor Management: Maintain subcontractor details including ABN, insurance, and payment history.
Construction businesses face specific EOFY obligations beyond standard business requirements:
For jobs spanning the end of financial year, calculate the value of work completed but not yet invoiced:
Job 2024-156 (started March, finishing August):
This WIP must be recorded as income in the financial year ending 30 June even though you have not invoiced it yet. This ensures profit is recognised in the correct period.
Count and value materials on hand at year end:
Value inventory at cost (what you paid for it). This becomes an asset on the balance sheet, reducing cost of goods sold and increasing profit for the year.
Example: If you purchased $15,000 in materials in June but only used $9,000, the $6,000 remaining should be counted as inventory, not expensed in June.
Calculate depreciation on tools, vehicles, and equipment owned at year end. Common construction asset depreciation rates:
Prepare and lodge TPAR by 28 August reporting all contractor payments from the previous financial year (1 July to 30 June).
Start preparing TPAR in July to allow time to:
Running your business without job costing means you cannot identify which work types are profitable. You may be busy and even profitable overall while consistently losing money on certain job types or clients.
Cost: Continuing to quote unprofitable work at low margins drains cash and prevents growth. A business doing $3 million revenue but averaging only 8% gross margin due to unprofitable jobs makes $240,000 gross profit. The same business at 20% margin (achievable by eliminating low-margin work) would make $600,000 gross profit.
Solution: Implement job costing software and review profitability by job type quarterly.
Many construction businesses incorrectly report GST on deposits received. The GST is reportable in the period you receive the deposit, not when you complete the work or recognise the full revenue.
Cost: If caught in an audit, you may owe back GST plus interest and penalties of up to $12,600.
Solution: Record deposits correctly in your accounting system with GST separated and reported in the correct BAS period.
Failing to lodge TPAR or lodging late results in automatic penalties.
Cost: $6,264 penalty, plus potential ATO audit attention on your business.
Solution: Set a reminder for 1 August each year to prepare TPAR. Keep contractor payment records accurate throughout the year rather than scrambling in August.
Using cash basis makes accurate profit measurement impossible for construction businesses with progress billing.
Cost: Incorrect profit reporting leads to poor decisions. You might think you are profitable in months when you receive large payments, and unprofitable in months with large material purchases, when reality is the opposite.
Solution: Switch to accrual accounting. This is required for businesses over $10 million revenue but recommended for any construction business.
Running out of cash despite having profitable jobs on the books is the most common cause of construction business failure.
Cost: Inability to pay suppliers leads to payment holds, delayed projects, penalties, and potential insolvency even while sitting on $200,000 in receivables.
Solution: Forecast cash flow weekly. Maintain a line of credit for temporary gaps. Chase overdue payments aggressively.
Many businesses fail to properly account for contract variations, either not documenting them or not adjusting job costs and revenue correctly.
Cost: Disputes with clients over unapproved variations, or absorbing cost increases that should have been charged to the client.
Solution: Use written variation forms for all scope changes. Update job budgets immediately when variations are approved. Invoice variations promptly.
Retention money is easy to forget, especially when it will not be received for 6-12 months after practical completion.
Cost: A business with $150,000 in retention across completed jobs is carrying this as an asset but may forget to follow up release. This is effectively an interest-free loan to your clients.
Solution: Set calendar reminders for retention release dates based on defect liability period expiry. Follow up 30 days before the release date.
What is TPAR and when must it be lodged?
The Taxable Payments Annual Report (TPAR) must be lodged by all building and construction businesses that pay contractors for building and construction services. TPAR is due by 28 August each year, reporting all contractor payments from the previous financial year (1 July to 30 June). The penalty for failing to lodge or lodging late is $6,264 as of 2025. You must report each contractor paid $10,000 or more, including their ABN, name, address, and total payments including GST.
How does job costing work for construction businesses?
Job costing tracks all revenue and costs for each specific project, allowing you to determine profitability per job. Every expense (materials, labour, equipment, subcontractors) is coded to both a chart of accounts category and a specific job number. Revenue from progress claims is also allocated to the job. This produces a profit and loss statement for each job, showing whether it is meeting budget expectations or losing money.
What is retention money in construction contracts?
Retention money is a percentage (typically 5-10%) withheld from each progress payment as security against defects or incomplete work. The retention is held for a defect liability period (usually 3-12 months after practical completion) and released when the client is satisfied all work is complete and defect-free. On your books, retention appears as "Retention Receivable" on the balance sheet, separate from regular accounts receivable.
How should construction businesses handle GST on deposits?
When you receive a deposit, the GST component must be reported on your BAS in the period you receive the deposit, not when you complete the work. For example, a $40,000 deposit received in June includes $3,636 GST that must be paid to the ATO by 28 July, even though the work will not be completed until September. This creates a cash flow consideration as the GST is due before you have incurred costs or completed the project.
Should construction businesses use cash or accrual accounting?
Construction businesses should use accrual accounting where income is recorded when invoiced and expenses when you receive the invoice, not when cash changes hands. Cash accounting causes incorrect profit reporting for businesses with progress billing because revenue is recorded when payment is received rather than when work is completed. This makes monthly profit reports meaningless and can misstate profit across financial years.
What is work in progress and how is it calculated?
Work in Progress (WIP) is revenue earned on incomplete projects that has not yet been invoiced. It is calculated as: (Costs incurred / Estimated total costs) x Contract value. For example, a $200,000 contract with $80,000 costs incurred and $140,000 estimated total costs is 57% complete, meaning $114,000 of revenue has been earned. If only $90,000 has been invoiced, WIP is $24,000. WIP must be recorded as income at financial year end to accurately state profit.
What vehicle expenses can construction businesses claim?
Construction businesses can claim vehicle expenses using either the logbook method (claim business percentage of all costs including fuel, registration, insurance, repairs, and depreciation) or cents per kilometre method (claim up to 5,000km at $0.88 per km for 2024-25). The logbook method requires keeping a 12-week logbook showing business vs private use but typically delivers higher deductions for trades businesses with significant vehicle use.
Do I need to pay super for subcontractors?
Generally, genuine contractors are responsible for their own superannuation. However, you must pay super for workers paid primarily for their labour, working under your direction, using your tools, and working set hours in set locations. These factors indicate employment, not contracting. Misclassifying employees as contractors to avoid super results in penalties, back payment of super with interest, and Superannuation Guarantee Charge. When in doubt, seek advice on the working arrangement.
What software is best for construction bookkeeping?
The best software depends on business size and complexity. Xero Projects ($100/month with Xero) suits smaller businesses doing fixed-price projects. Tradify ($79/month) excels for service trades with scheduling needs. AroFlo ($145/month) provides comprehensive features for larger businesses including complex job costing and retention tracking. All must integrate with your accounting system and handle TPAR reporting, job costing, and progress billing.
How can construction businesses improve cash flow?
Construction businesses improve cash flow by: requiring larger deposits (30% instead of 10%) to cover initial material costs, structuring progress payments to avoid funding large gaps, forecasting cash weekly not monthly, chasing overdue payments aggressively, negotiating extended terms with key suppliers, and maintaining a line of credit for temporary timing gaps. The mismatch between paying suppliers (30 days) and receiving client payments (30-60 days from invoicing) requires active management.
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