Job Cost Accounting for Contractors Just Got a New Option: Here's What Changed
A residential builder used to have exactly one choice for job cost accounting on a multi-unit project: report income as the work happened, whether or not that matched what was actually sitting in the bank. That's the percentage-of-completion method, and it was mandatory for most residential contracts long enough to cross a tax year. A change from last year's tax law opened up a second option for a lot of builders, and if your job cost accounting for contractors still assumes percentage-of-completion is the only path, you could be paying tax on a project before you've collected the money that pays it.
What percentage-of-completion actually does
Under percentage-of-completion, you recognize revenue and the matching costs in proportion to how much of the contract is finished each year, based on costs incurred against total estimated costs. Say a project is 40% done by cost at year-end. You report 40% of the contract's expected profit as taxable income that year, even if the buyer hasn't closed, the units haven't sold, and most of that money is still tied up in materials, subcontractor draws, and work in progress. The IRS doesn't care that the cash isn't liquid. It cares that the work is.
The new exception, and who qualifies
The 2025 tax law expanded the exemption from percentage-of-completion to cover residential construction contracts, meaning buildings with more than four dwelling units, not just single-family homes. To qualify, the contract has to run three years or less, and your average annual gross receipts over the prior three years have to fall under $31 million. It applies to contracts entered into in tax years starting after July 4, 2025. If your project fits that box, you're no longer locked into percentage-of-completion. You can use another permitted method instead, one that lets you hold off recognizing income until units are substantially complete or delivered, rather than spreading it across the build.
Why this changes your cash flow, not just your bookkeeping
Here's what that looks like on an actual project. A residential builder client of ours is running a 14-unit townhome development, a $5.6 million contract on an 18-month build. Under percentage-of-completion, the numbers would have forced roughly $1.8 million of income onto the books in year one, based on costs incurred, well before a single unit closed or a buyer's check cleared. That income comes with a tax bill attached. Electing the new exception on this contract deferred that recognition until the units deliver, which kept about $310,000 in cash working inside the project instead of going out the door as estimated tax while the building was still framed.
That's the real value here. It's not a deduction and it's not free money. It's timing, and timing is cash flow. A dollar you don't have to send to the IRS in year one is a dollar that can cover a draw, a subcontractor payment, or a material order without you pulling from a line of credit.
What to check before your next contract
The election happens at the contract level, not once for your whole business, so this is a decision you make project by project, and it has to be made before you're deep into the build, not discovered at tax time. Run the numbers: does the project qualify under the unit count, the term, and the gross receipts test? If it does, which method actually serves your cash position better this year versus deferring the hit to a year when your revenue might already be lower?
This is exactly the kind of decision job cost accounting for contractors should catch and often doesn't. A lot of preparers are running the numbers a client hands them without asking whether the accounting method itself is still the right one for a new contract. If nobody's checking that question before you sign, you're leaving the choice to default rules instead of making it on purpose.
Before you break ground on the next multi-unit contract, get the accounting method decision made up front. It's easier to elect the right method at the start than to explain to your bank or your bonding company why last year's income doesn't match this year's.
Download the $10K Tax Leak Checklist. It covers the seven areas where contractors overpay most, including accounting method choices most preparers never flag. Most people find at least two or three they've never addressed.