Construction Management
Construction Contract Accounting: Fixed-Price vs Cost-Plus vs GMP (Guaranteed Maximum Price)
Construction contract accounting determines how revenue and expenses are recognized, how risks are managed, and how profits are protected. Whether it’s fixed-price, cost-plus, or guaranteed maximum price (GMP), each contract type requires unique accounting treatment. Modern construction ERP systems help contractors manage these variations automatically.
The importance of contract accounting in construction
Unlike standard business agreements, construction contracts can span months or years, with fluctuating costs and variable payment schedules. Accounting for revenue, retainage, and cost recovery accurately is crucial to maintaining cash flow and avoiding disputes.
- Long-term performance: Costs and revenues must be recognized progressively over time.
- Variable billing: Each contract type has distinct rules for progress billing and profit calculation.
- Risk allocation: Some contracts shift cost risk to the contractor, while others share it with the client.
1. Fixed-Price (Lump Sum) Contracts
In a fixed-price contract, the contractor agrees to deliver a project for a predetermined sum. This model provides pricing certainty to clients but places cost overrun risk squarely on the contractor.
- Revenue recognition: Percentage-of-completion method based on cost or progress milestones.
- Accounting focus: Tight cost control and variance tracking.
- Best suited for: Projects with predictable scopes and minimal change orders.
- Key challenge: Managing material price fluctuations and unforeseen site conditions.
2. Cost-Plus Contracts
Cost-plus contracts reimburse contractors for actual project costs plus an agreed-upon fee or percentage markup. They shift financial risk to the client but require detailed documentation and transparency.
- Revenue recognition: Based on reimbursable costs recorded during the project.
- Accounting focus: Expense accuracy and documentation for client audits.
- Best suited for: Complex or design-build projects with uncertain scopes.
- Key challenge: Maintaining clear communication and accurate cost reporting.
3. Guaranteed Maximum Price (GMP) Contracts
Under a GMP contract, the contractor agrees to cap total project costs at a maximum limit. Any savings below that cap may be shared with the owner, while overruns are typically the contractor’s responsibility.
- Revenue recognition: Progressive, based on work completed and allowable costs under the GMP cap.
- Accounting focus: Risk monitoring, change order tracking, and cost containment.
- Best suited for: Large-scale projects requiring predictable budgeting.
- Key challenge: Balancing risk exposure with potential savings incentives.
How accounting software manages contract types
- Automated revenue recognition: Configure contract-specific rules for each project type.
- Change order integration: Adjust budgets and forecasts in real time as scope changes.
- Cost tracking: Link labor, materials, and subcontractor expenses to each contract category.
- WIP reporting: Produce Work-in-Progress schedules with accurate profit forecasting.
- Risk dashboards: Visualize potential overruns, unbilled revenue, and contingency reserves.
Top accounting software for contract-based construction
- Sage 300 CRE: Handles multi-contract environments with built-in WIP and progress billing tools.
- Viewpoint Vista: Integrates job cost, contract management, and automated revenue recognition.
- Procore Financials: Provides flexible contract setup for fixed-price, cost-plus, and GMP billing models.
- Deltek Vantagepoint: Tailored for firms managing multiple funding streams and project types.
- CMiC: Enterprise-grade accounting with robust change management and audit control.
Key metrics for contract accounting performance
- Cost-to-complete accuracy: How closely actual cost projections align with reality.
- Contract margin variance: Difference between forecasted and realized profit margins.
- Change order cycle time: Days between request and approval.
- Cash flow position: Comparison of billed vs. collected revenue for each project.
SEO-friendly FAQs
What is construction contract accounting? It’s the financial management of construction projects based on contract type, ensuring accurate revenue recognition and cost control.
Which contract type carries the most risk for contractors? Fixed-price and GMP contracts typically expose contractors to higher financial risk.
How does software simplify contract accounting? By automating billing, cost tracking, and compliance reporting for each contract model.
Which system is best for managing multiple contract types? Viewpoint Vista and Sage 300 CRE offer flexible setups for handling diverse contract structures.
Bottom line
Each construction contract type brings different financial challenges. By leveraging contract-aware accounting software, contractors can balance risk, improve cost control, and ensure consistent profitability across projects — no matter how they’re structured.
- Top Expert
Nathan Rowan
Program Research, Editor, Expert in ERP, Cloud, Financial Automation
