7 Accounting Mistakes That Kill Contractor Profits

The most common contractor accounting mistakes are: mixing personal and business finances (IRS red flag), not doing job costing (can't know which jobs are profitable), using cash accounting for completed work (distorts true profit), and failing to bill for all time and materials. These mistakes cost the average contractor 10-25% of potential profits.

Mistake #1: Mixing Personal and Business Finances

The Problem: Using personal accounts for business, personal cards for supplies, or paying yourself irregularly.

Why It Hurts:

• IRS audit risk (looks like tax evasion)
• Can't track true business profitability
• Loses liability protection (LLC/Corp)
• Makes bookkeeping 3x harder

The Fix:

1. Separate business bank account
2. Separate business credit card
3. Regular owner draws (same day each month)
4. Never use personal accounts for business purchases

Cost of Mistake: Tax penalties, lost deductions, audit costs ($5,000-50,000+)

Mistake #2: No Job Costing

The Problem: Knowing you made $200K in revenue but not knowing which jobs were profitable.

Why It Hurts:

• Can't identify money-losing job types
• Can't price accurately
• Can't fire bad customers
• Flying blind on business decisions

The Fix:

1. Track labor by job (every day)
2. Assign materials to jobs
3. Calculate profit per job at completion
4. Review patterns quarterly

What to Track Per Job:

Cost of Mistake: Repeating unprofitable work, pricing too low (10-20% margin loss)

Mistake #3: Cash vs. Accrual Confusion

The Problem: Using cash accounting when accrual would be more accurate (or vice versa).

Cash Accounting:

• Revenue recorded when cash received
• Expenses recorded when paid
• Simpler, but distorts long projects

Accrual Accounting:

• Revenue recorded when earned
• Expenses recorded when incurred
• More accurate for project-based work

Why It Matters: A job where you spend $50K in December and get paid $80K in January shows:

• Cash basis: $50K loss in December, $80K profit in January
• Accrual basis: $30K profit spread across project

The Fix:

• Under $1M revenue: Cash accounting usually fine
• Over $1M or multi-month projects: Consider accrual or hybrid
• Consult accountant for your situation

Mistake #4: Not Billing for Everything

The Problem: Work gets done but doesn't make it to the invoice.

Common Unbilled Items:

• Extra materials picked up for job
• "Quick" change orders not documented
• Time spent on customer calls/visits
• Crew overtime
• Additional trips to job site

Why It Hurts: Average contractor fails to bill 5-8% of billable items. On $500K revenue, that's $25,000-40,000 lost.

The Fix:

1. Document everything in real-time
2. Review daily logs before invoicing
3. Search communications for "extra," "additional"
4. Train crew to report all changes

Mistake #5: Ignoring Retention

The Problem: Not tracking retention receivable or not collecting it.

What is Retention: 5-10% of invoice held until project completion (common in commercial work).

Why It Hurts:

• Retention adds up ($50K on a $500K job)
• Easy to forget to bill after final
• Cash flow impact

The Fix:

1. Track retention per job in accounting
2. Bill retention immediately upon completion
3. Follow up aggressively (it's YOUR money)
4. Include retention billing in close-out checklist

Mistake #6: Poor Expense Categorization

The Problem: Throwing everything into "Supplies" or "Materials" without proper categorization.

Why It Hurts:

• Misses deductions (vehicle, equipment, meals)
• Can't analyze true costs
• Harder to price future jobs
• Tax preparer frustration = higher fees

Good Categories for Contractors:

Mistake #7: Not Reconciling Regularly

The Problem: Weeks or months pass without checking bank statements against books.

Why It Hurts:

• Errors compound over time
• Fraud goes undetected
• Can't catch bank errors
• Year-end becomes nightmare

The Fix:

1. Reconcile bank accounts monthly (minimum)
2. Reconcile credit cards monthly
3. Review open invoices weekly
4. Check outstanding payments weekly

Time Investment:

• Weekly: 30 minutes
• Monthly: 1-2 hours
• Value: Catches errors worth thousands

Bonus: Tax Mistakes

Not Paying Estimated Taxes

Self-employed contractors owe quarterly estimates:

• April 15
• June 15
• September 15
• January 15

Penalty for missing: 3-5% of underpayment

Missing Deductions

Commonly missed contractor deductions:

• Home office (if applicable)
• Vehicle mileage (or actual costs)
• Tools and equipment (or depreciation)
• Continuing education
• Professional association dues
• Safety equipment
• Cell phone (business portion)

Misclassifying Employees

Workers are either employees (W-2) or contractors (1099).

1099 requirements:

• Control over how work is done
• Own tools and equipment
• Multiple clients
• Set own schedule

Risk of misclassification: Back taxes, penalties, and interest can exceed original wages.

How to Fix Your Accounting

Quick Wins (This Week)

1. ✅ Open separate business bank account
2. ✅ Get business credit card
3. ✅ Start tracking labor by job (even just on paper)

Medium-Term (This Month)

1. Set up proper accounting software (QuickBooks, Wave)
2. Create job costing system
3. Review last 3 months of unbilled items

Long-Term (This Quarter)

1. Hire bookkeeper or accountant
2. Implement weekly reconciliation habit
3. Create close-out process for invoicing

FAQ

Do I need QuickBooks for construction?

QuickBooks works for most small contractors. QuickBooks Online is fine under $1M. Above that, consider QuickBooks Desktop for better job costing or construction-specific software.

How often should I do job costing?

Track time and materials in real-time. Calculate job profit at completion. Review patterns quarterly.

Should I do my own bookkeeping?

If you're under $200K revenue and have time, you can DIY with guidance. Above that, consider a bookkeeper (4-8 hours/month, $200-500).

What's the biggest accounting mistake contractors make?

Not knowing which jobs are profitable. Without job costing, you're guessing at pricing and might be losing money on specific work types without knowing it.

The Bottom Line

Contractor accounting mistakes cost 10-25% of profits. The basics:

1. Separate finances
2. Job cost everything
3. Bill for all work
4. Reconcile regularly
5. Categorize properly

Get these right before worrying about advanced strategies.

Related: How to Price Construction Jobs | 10 Ways Contractors Lose Money