Construction Accounting Glossary

A current liability on the balance sheet representing progress billings that exceed the revenue earned to date based on percentage of completion. Commonly called overbilling. The contractor has billed for work not yet completed — the excess must be earned off as the project progresses. Surety underwriters view large overbilling positions as a liability, not a profit signal.

The minimum annual revenue a contractor must generate to cover all overhead costs before earning a single dollar of profit. Calculated as Total Annual Overhead ÷ Gross Margin %. Below breakeven, every dollar of revenue still produces a loss. Above it, every additional dollar of gross profit goes straight to the bottom line.

The true all-in cost of an employee per productive hour, including base wage plus statutory payroll costs (CPP, EI, WCB), vacation pay, stat holiday pay, benefits, and any union dues. The number that should be used for job costing and bid preparation — not just the base wage rate. Using only base wage systematically underestimates labour cost.

A formal amendment to a construction contract that modifies the scope, price, or schedule of the original agreement. Change orders must be approved in writing before the work is performed. Unapproved scope additions are one of the most common causes of underbilling and margin fade — the work gets done, the cost hits the books, but the contract value is never updated.

A forward-looking estimate of what it will cost, starting from today, to finish a project. The most critical input in a WIP schedule. When CTC is estimated honestly — based on actual field productivity, remaining subcontractor commitments, and current material costs — the WIP schedule accurately reflects project profitability. When CTC becomes a plug number used to maintain the desired margin, the WIP becomes unreliable and surety underwriters notice.

A current asset on the balance sheet representing earned revenue that has not yet been billed. Commonly called underbilling. The contractor has completed the work but not yet invoiced the owner. Persistent underbilling is a cash flow warning sign — costs have been incurred but cash has not come in, effectively funding the job from working capital.

The amount of contract revenue a contractor has actually earned based on the percentage of work completed, regardless of what has been billed. Calculated as Contract Value × Percentage Complete. Earned revenue is the correct basis for revenue recognition under percentage of completion accounting and may differ significantly from what has been invoiced.

Revenue minus direct job costs (labour, materials, subcontractors, equipment), expressed as a percentage of revenue. The primary measure of project and business profitability in construction. Gross margin must exceed the overhead recovery rate for a business to be profitable. Different from markup — a 25% markup produces a 20% margin, not 25%.

A portion of each progress billing — typically 10% in Alberta — that the owner withholds until the project reaches substantial completion. A significant asset on many contractors' balance sheets that must be tracked separately from regular AR. Holdback is not liquid until released, and surety underwriters distinguish between collectible AR and holdback when assessing working capital quality.

The process of tracking all costs — labour, materials, subcontractors, equipment, and overhead allocations — against individual projects in real time. Job costing is the foundation of construction financial management. Without it, a contractor cannot know which jobs are profitable, where overruns are occurring, or whether their bid prices are accurate.

The erosion of a project's gross margin between bid and close. A job estimated at 18% gross margin that closes at 11% has experienced 7 points of margin fade. Common causes include scope creep without change orders, cost overruns in early phases, productivity below estimate, and material price increases. Surety underwriters track margin fade across multiple reporting periods — consistent fade signals weak estimating or project controls.

Markup is the percentage added to cost to arrive at a price. Margin is gross profit as a percentage of revenue. They are not interchangeable. A 25% markup on a $100 cost produces a $125 price and a 20% margin — not 25%. Confusing the two leads to systematic underpricing.

Total annual overhead expressed as a percentage of revenue. Tells you how many cents of every revenue dollar go to covering fixed costs before a cent of profit is generated. Your gross margin must exceed your overhead recovery rate to be profitable.

An accounting method that recognizes revenue and profit in proportion to the work completed on a project, rather than waiting until the project is finished. The most appropriate method for long-term construction contracts. Percentage complete is most defensibly calculated as Cost to Date ÷ Total Estimated Cost — the method surety underwriters expect to see in a WIP schedule.

A Canadian information return that construction businesses must file with CRA when they pay $500 or more to subcontractors for construction services. Reports the total amount paid to each subcontractor during the fiscal year. Failure to file carries penalties. Many general bookkeepers unfamiliar with construction miss this filing requirement.

A monthly schedule summarizing the financial position of all active construction projects — showing percentage complete, earned revenue, billings to date, overbillings, underbillings, cost to complete, and projected margin at completion for each job. The most important financial document a contractor produces for surety underwriters, lenders, and management. Updated monthly with honest CTC estimates, it is a credibility signal. Updated only at year-end, it is a red flag.

A summary of all contracted but not yet started work — the backlog. Shows total contract value of work committed but not yet reflected in the WIP schedule. Surety underwriters use the WOH schedule to assess pipeline, execution risk, and whether the contractor's resources are matched to their committed workload.

The maximum total value of bonded contracts a contractor can have outstanding at any one time. Set by the surety underwriter based on three capacity tests — working capital, net worth, and revenue — with the lowest result becoming the limit. Not fixed: it responds to balance sheet management, financial reporting quality, and underwriter confidence in the contractor's systems.

The lowest level of CPA assurance on financial statements. The CPA assembles the statements from management-provided information but does not verify or test anything. Surety underwriters apply conservative multipliers to compilation-based statements. For contractors pursuing larger work, a compilation is often a glass ceiling on bonding capacity.

Total interest-bearing debt divided by shareholders' equity. Surety underwriters typically prefer a ratio below 2:1 and apply additional scrutiny above 3:1. Surety calculates this using their adjusted equity figure — which removes goodwill, intangibles, and shareholder loans — making the ratio look worse than the book figure when equity adjustments are significant.

A surety bond guaranteeing a contractor will pay all subcontractors, suppliers, and labourers on a project. Protects the project owner from liens and claims arising from non-payment. Often required alongside a performance bond on public and institutional work.

A surety bond guaranteeing a contractor will complete a project according to the contract terms. If the contractor defaults, the surety steps in — either financing the contractor to complete the work, hiring a replacement contractor, or paying the owner the cost of completion up to the bond amount. The fundamental instrument of construction risk transfer.

A level of CPA assurance above a compilation and below an audit. The CPA performs analytical procedures and inquiry to provide limited assurance that financial statements are plausible. Surety underwriters apply higher working capital and net worth multiples to review-engaged statements — sometimes doubling available bonding capacity without a single dollar changing on the balance sheet. For contractors pursuing larger public or ICI work, a review engagement is typically the entry fee.

An insurance product providing coverage against subcontractor default across a GC's entire project portfolio — an alternative to bonding each subcontractor individually. Transfers default risk off the GC's balance sheet, which surety underwriters view favourably and which can unlock higher aggregate bonding capacity.

A legal agreement — also called a Standby Agreement — in which a shareholder agrees not to demand repayment of a loan made to the corporation while any bonded project is outstanding. The surety reclassifies the subordinated loan from a liability to equity, instantly improving surety-adjusted net worth. One of the most underused levers in surety finance.

A contractor's book equity modified by surety underwriting adjustments: goodwill and intangibles removed, shareholder loans receivable removed, and subordinated shareholder debt added back as equity. Used in the net worth capacity test. The difference between book equity and surety-adjusted net worth can be significant when intangibles are large.

Book working capital modified by surety underwriting adjustments: AR over 90 days removed, inventory discounted to 50%, prepaid expenses removed, overbillings treated as a liability, underbillings credited as an asset. A more conservative — and in surety's view more realistic — measure of liquid financial strength. The primary input to the working capital capacity test.

The multiplier applied by surety underwriters to surety-adjusted working capital to determine the working capital capacity test result. Typically 10× for subcontractors and 15–20× for general contractors. A $500,000 adjusted working capital at 10× produces a $5,000,000 capacity test result. Higher multiples reflect greater underwriter confidence in the contractor's financial management and reporting.

The highest level of CPA assurance. An independent auditor tests transactions, confirms balances with third parties, and issues an opinion on whether the financial statements present fairly in all material respects. For contractors pursuing large bond programs or working with large public owners, audited statements remove virtually all underwriter doubt and support maximum available multiples.

A projection of cash inflows and outflows over a defined period. In construction, a meaningful cash flow forecast must account for billing cycles, retainage release timing, subcontractor payment obligations, and backlog conversion. A cash flow forecast tied to project backlog is fundamentally different from — and far more useful than — a simple accounting-based projection.

The complete list of account categories used to record financial transactions. A construction-specific chart of accounts separates direct job costs from overhead, tracks retainage receivable and payable separately, and supports job costing through proper cost allocation. A generic chart of accounts built for retail or services cannot produce construction-ready financial reporting.

A structured summary of key performance indicators tracked monthly alongside financial statements. In construction, relevant KPIs include gross margin by job type, overhead recovery rate, working capital ratio, AR aging, WIP overbilling and underbilling position, backlog-to-revenue ratio, and cash conversion cycle. A well-built dashboard tells a contractor — and their surety — whether the business is performing in line with plan before year-end numbers arrive.

A revolving credit facility allowing a contractor to draw and repay funds as needed, up to an approved limit. Used to manage cash flow timing gaps in construction. A LOC balance sitting in current liabilities reduces surety-adjusted working capital dollar for dollar — and that reduction is multiplied by the working capital multiple. A permanently drawn LOC is both a cash flow warning sign and a bonding capacity constraint.

A narrative section accompanying financial statements in which management explains the numbers — what drove revenue, why margins moved, what the cash flow picture means, and what the outlook looks like. For sureties and lenders, a well-written MD&A demonstrates that management is in command of the numbers. It transforms financial statements from a compliance document into a management communication.

All costs required to run the business that are not directly attributable to a specific project — office and management salaries, rent, insurance, vehicles not allocated to jobs, software, professional fees, and similar fixed or semi-fixed costs. Overhead must be recovered through gross margin on jobs. Understanding the relationship between overhead, gross margin, and breakeven revenue is fundamental to pricing and business planning.

The total cost of statutory payroll obligations on top of base wages — CPP, EI, WCB, vacation pay, and stat holiday pay. In Alberta, the payroll burden on a construction site worker typically adds 15–20% to the base wage before any benefits are considered. Payroll burden must be allocated to job cost to accurately reflect the true cost of labour on each project.

Current assets minus current liabilities. A measure of short-term financial liquidity and operational flexibility. In construction, working capital is scrutinized by both sureties and lenders — not just the total, but the quality. High AR aging, large overbilling positions, and undisclosed holdbacks can make working capital look stronger than it actually is.