Three things make construction accounting different: retention money withheld until defects liability expires, work in progress that must be recognised before it is invoiced, and progress billing that rarely matches the work actually done in a period. Get those three wrong and your profit figure is fiction — usually flattering fiction in the early stages of a contract.
Add the compliance layer — CIDB grading, a COID letter of good standing, and tax clearance for every principal contractor — and construction is the most administratively demanding industry a South African SME can be in.
1. Retention
What it is: the client withholds a percentage of each payment — commonly 5% to 10% — until practical completion, and often holds half of that until the defects liability period ends, typically 6 or 12 months later.
Why it distorts the books: retention is income you have earned but will not receive for months. It belongs in revenue when earned, and sits as a debtor until released.
Worked example. A R4.2 million contract with 10% retention, half released at practical completion and half twelve months later.
| Amount | |
|---|---|
| Contract value | R4,200,000 |
| Retention withheld (10%) | R420,000 |
| Released at practical completion | R210,000 |
| Released after defects liability | R210,000 |
R210,000 sits in your debtors for a year after you finish. On a business running three or four contracts, retention receivable can easily exceed R1 million — money earned, taxed, and not in your bank.
Two rules:
Track retention separately from ordinary debtors. It has a different collection date and a different risk.
Diarise every release date. Unclaimed retention is the most commonly forgotten money in construction, and after a few years it is very difficult to recover.
2. Work in progress
Costs incurred on a contract that has not yet been billed are work in progress — an asset, not an expense.
Why it matters: if you expense the costs but have not recognised the revenue, you show a loss in one month and an artificial profit in the next. Your monthly numbers become meaningless, and so does any decision made from them.
The general principle under IFRS for SMEs is that contract revenue and costs are recognised by reference to the stage of completion, where the outcome can be estimated reliably.
The practical method for a small contractor:
Stage of completion = costs incurred to date ÷ total estimated costs
Apply that percentage to the contract value to get revenue earned to date, then subtract what you have already invoiced.
Worked example. Contract value R2,800,000. Total estimated cost R2,100,000. Costs incurred to date R840,000. Invoiced to date R900,000.
Stage of completion: R840,000 ÷ R2,100,000 = 40%
Revenue earned: 40% × R2,800,000 = R1,120,000
Invoiced: R900,000
Accrued revenue (asset): R220,000
If you had invoiced R1,300,000 instead, you would carry R180,000 of deferred revenue — a liability, because you have billed ahead of the work.
Update your total estimated cost every month. Stage of completion is only as good as the cost-to-complete estimate, and a contract heading for an overrun shows it here first — months before it shows in cash.
3. Progress billing and certificates
Payment usually follows a payment certificate issued by the principal agent or quantity surveyor, not your invoice.
The sequence: you claim, the agent certifies (often for less than you claimed), you invoice the certified amount, the client pays after the agreed period.
Three accounting consequences:
Revenue follows stage of completion, not the certificate. The certificate drives cash, not profit.
Certified-less-than-claimed is a variance to investigate immediately, not at year-end.
VAT timing follows the tax invoice, so certification delays push output VAT into a later period. Do not invoice before certification unless you want to fund the VAT on money you have not been certified for.
Costing by contract
You cannot manage a construction business from a single profit figure. Every cost must carry a contract code.
Track per contract:
| Line | Source |
|---|---|
| Contract value, including approved variations | Contract and variation orders |
| Costs to date | Ledger, coded by contract |
| Estimated cost to complete | Site manager's estimate, updated monthly |
| Total estimated cost | Costs to date + cost to complete |
| Forecast margin | Contract value − total estimated cost |
| Certified to date | Payment certificates |
| Retention held | Certificates |
The forecast margin is the number that matters. A contract whose forecast margin drops from 18% to 6% over two months is telling you something urgent, and it is invisible in the monthly income statement.
Variations must be approved in writing before you do the work. Unapproved variations are the single largest source of construction disputes and write-offs.
Subcontractors: the classification risk
A subcontractor who works only for you, on your sites, on your hours, using your equipment, is at real risk of being treated as an employee for tax purposes.
The statutory presumptions bite where the person works mainly at premises occupied by the client and is subject to control or supervision as to the manner of the work, or as to their hours.
If SARS reclassifies: you owe the PAYE you should have deducted, plus UIF, SDL, penalties and interest at 10.25% per annum. On a subcontractor paid R45,000 a month for two years that exceeds R300,000.
The safe harbour: the presumptions do not apply where the person employs three or more full-time employees who are not connected persons. A genuine subcontracting business with its own crew is on much firmer ground than a single person with a bakkie.
See independent contractor or employee.
Also check: whether the subcontractor has their own COID letter of good standing. Principal contractors are generally required to ensure subcontractors on site are covered, and a subcontractor without cover can become your exposure.
The compliance layer
Construction has more gatekeeping documents than any other SME sector.
CIDB registration and grading. Determines the maximum contract value you may tender for. Grading is based on financial capability and track record, so upgrading requires both — and the financial evidence comes from your annual financial statements. Plan the upgrade a year ahead.
COID letter of good standing. You generally cannot get workers onto a site without it. It requires COIDA registration, a current Return of Earnings and a paid assessment, and it expires — typically after 12 months. See what is COIDA.
Tax Compliance Status PIN. Required by nearly every principal contractor and every public tender. Note that it is verified live, so a lapsed VAT return mid-contract shows as non-compliant. See how to get a tax clearance certificate.
CSD registration for public sector work. See how to register on the CSD.
B-BBEE affidavit or certificate. Note that the construction sector has its own charter, so the generic EME and QSE thresholds may not apply to you.
Bargaining council. Much of the sector is covered, with wage rates and levies above the national minimum.
Cash flow is the real risk
Construction businesses fail with full order books more often than with empty ones.
The structural squeeze: you pay wages weekly and suppliers at 30 days, while certification takes weeks and payment takes 30 to 60 days after that, with 10% retained on top.
What helps:
A 13-week cash flow forecast, updated weekly. See how to build one.
Claim on time, every cycle. A missed claim cycle is a month of cash gone.
Chase certification, not just payment. The delay is usually upstream of the invoice.
Negotiate materials on account to match the payment cycle.
Do not fund a contract from another contract's certificate. It works until one client pays late, and then it fails everywhere at once.
Frequently asked questions
How does accounting work for a construction business in South Africa? Revenue and costs are recognised by reference to the stage of completion rather than when invoiced, retention withheld by clients is tracked separately as a long-dated debtor, and every cost is coded to a contract so forecast margin can be monitored monthly.
What is retention in construction accounting? A percentage of each payment, commonly 5% to 10%, withheld by the client until practical completion and often partly until the defects liability period ends. It is income earned but not yet received, and it should be tracked separately from ordinary debtors with every release date diarised.
How do I calculate work in progress on a contract? Divide costs incurred to date by total estimated costs to get the stage of completion, apply that percentage to the contract value to get revenue earned, then compare against what you have invoiced. The difference is either accrued revenue or deferred revenue.
Are my subcontractors actually employees? They may be. The statutory presumptions treat a person as not independent where they work mainly at your premises and are subject to your control or supervision as to the manner of their work or their hours. The presumptions do not apply where the subcontractor employs three or more full-time unconnected employees.
Do I need a COID letter of good standing for construction? In practice yes. Most sites and principal contractors require it before workers can start, and it requires COIDA registration with a current Return of Earnings and a paid assessment. It typically expires after 12 months.
What is CIDB grading based on? Financial capability and track record, which determine the maximum contract value you may tender for. Because the financial evidence comes from your annual financial statements, upgrading generally needs to be planned a year in advance.
Why do construction businesses run out of cash with full order books? Because wages are paid weekly and suppliers at 30 days, while certification takes weeks, payment follows 30 to 60 days later, and 10% is retained on top. The gap between work done and cash received is structurally wide, which is why weekly cash forecasting matters more in construction than in almost any other sector.
Contract-level numbers, monthly
A construction business run on a single monthly profit figure is being run blind. The information that matters is per contract, and it changes every month.
Smartbook sets up contract costing, calculates stage of completion and work in progress, tracks retention with release dates, and produces monthly management accounts showing forecast margin by contract — alongside the CIDB, COID and tax compliance documents you need to keep working.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Contract revenue recognition under IFRS for SMEs is fact-specific — the stage of completion method described is a simplified practical approach. Worked examples are illustrative. General guidance, not advice on your circumstances.
Primary sources: CIDB · Department of Employment and Labour — Compensation Fund · SARS — Value-Added Tax · SARS — Tax Compliance Status · IFRS for SMEs