QuickBooks Online Setup for Construction Contractors — Step-by-Step Guide

Why standard QBO setup fails contractors

When you set up QBO for a retail business or a service company, the default chart of accounts and workflow works fine. For construction contractors, it doesn't — and using a generic setup leads to three specific problems:

• No job-level profitability — you can't see if individual projects made or lost money
• WIP reports are impossible — you can't calculate percent complete or over/under billings
• Retainage is invisible — money held back by the GC or owner doesn't show correctly

Here's the correct setup to avoid all three.

Step 1: Choose the right QBO subscription

For construction contractors, you need QBO Plus or QBO Advanced — not Simple Start or Essentials. You need Plus or above because it includes:

• Class tracking (for cost categories like labor, materials, subs)
• Location tracking (for tracking multiple job sites or divisions)
• Project profitability reports

Without these features, job costing in QBO is essentially impossible. If your client is already on Simple Start or Essentials, they need to upgrade before you can set things up correctly.

Step 2: Build the correct chart of accounts

The default QBO chart of accounts is generic. For construction, you need accounts that map to how contractors actually track money. Here's the core structure:

The two most important accounts that most bookkeepers miss: Costs in Excess of Billings and Billings in Excess of Costs. These are the WIP accounts. They represent the difference between what a contractor has earned (based on percent complete) and what they've actually billed. Without them, the balance sheet is wrong and WIP reports are impossible.

Step 3: Set up Customers as Jobs

In QBO, each construction project should be set up as a sub-customer under the GC or owner. This is how job costing works in QBO — every transaction tagged to a sub-customer becomes a job cost.

Structure it like this:

Every invoice, bill, expense, and paycheck should be tagged to the sub-customer (the project). This is what generates the job costing reports you need for WIP.

Step 4: Enable and configure Class tracking

Classes in QBO map to cost types — the categories of costs on each job. For construction, the standard classes are:

• Labor — direct field labor costs
• Materials — lumber, concrete, fixtures, etc.
• Subcontractors — electrical, plumbing, HVAC subs
• Equipment — owned or rented equipment
• Other Direct Costs — permits, bonds, misc job costs

Enable classes in QBO: Settings → Account and Settings → Advanced → Categories → Track classes. Set it to "One to each row in transaction."

With classes on, every transaction tagged to a project AND a class gives you a full breakdown of where money is going on each job.

Step 5: Set up retainage correctly

Retainage is money withheld from progress billings — typically 5–10% — until the project is complete. Most bookkeepers handle this wrong, which causes the accounts receivable to look inflated and the WIP report to be inaccurate.

The correct approach:

• When you invoice the owner/GC, bill the full contract amount earned
• Create a separate line item for retainage withheld (negative amount, coded to Retainage Receivable)
• The net invoice equals what's actually due now
• When retainage is released at project completion, invoice it separately

This keeps retainage visible on the balance sheet and out of regular AR — exactly what lenders and bonding companies want to see.

Step 6: Enter contract amounts and budgets

For WIP reporting, you need two numbers for every project:

• Original contract amount — what the contractor is being paid
• Estimated total cost — what they expect to spend to finish it

In QBO Projects, you can enter a project budget. This becomes the "Estimated Costs" figure on the WIP schedule. The actual costs that flow through from bills and expenses become the "Costs to Date."

Without these two numbers, you can't calculate percent complete, and you can't produce a WIP report. Make sure your client (or their project manager) enters a cost budget for every project before it starts.

Step 7: Reconcile monthly and produce WIP reports

Once QBO is set up correctly, the monthly workflow for a construction contractor looks like this:

1. Code all bills, expenses, and payroll to the correct job and class
2. Invoice progress billings with retainage split out correctly
3. Reconcile bank and credit card accounts
4. Update estimated costs for any jobs where the budget has changed
5. Pull the WIP schedule and review over/under billings
6. Post journal entries for costs in excess and billings in excess

That last step — pulling the WIP schedule — is where most bookkeepers spend the most time. If you're doing it manually in Excel, pulling numbers from QBO one by one, it takes hours per client.

Common mistakes to avoid

• Using one income account for everything

  Fix: Separate contract revenue by project type if the contractor does commercial, residential, and service work

• Skipping retainage tracking

  Fix: Set up Retainage Receivable and Retainage Payable from day one — retrofitting this later is painful

• Forgetting to tag payroll to jobs

  Fix: Direct labor is a job cost — make sure payroll items are mapped to jobs and classes

• Not entering cost budgets

  Fix: Without estimated costs, WIP percent complete is impossible to calculate accurately

• Using Expenses instead of Bills for vendor invoices

  Fix: Bills tie to AP and give you better job cost timing — use Bills for everything that comes in with a vendor invoice

Summary: QBO construction setup checklist

• QBO Plus or Advanced subscription
• Construction chart of accounts with WIP accounts
• Customers set up as jobs (sub-customers per project)
• Classes enabled and mapped to cost types
• Retainage Receivable and Retainage Payable accounts active
• Cost budgets entered for every active project
• Monthly WIP schedule review in workflow

Questions about setting up QBO for a construction client? Email us or browse more guides.