What Are Contract Assets and Liabilities?
Think of contract assets as work you’ve done but haven’t yet billed for. You’ve earned it, just haven’t invoiced it. It’s money in the pipeline.
Contract liabilities, on the other hand, are payments you’ve received upfront for work you haven’t completed yet. The customer’s paid you—but you still owe them the service.
Why the Change?
The new rules are part of the broader effort to standardize revenue recognition. Here’s what that means for you:
- Deeper Understanding – You’ll need to dig into the details of each contract to understand when work is actually “earned.”
- Timing Shift – Your books might show earnings differently now, depending on whether work has been billed or not.
- Stronger Contracts – Clearer financials push companies to better understand and manage their contracts.
Real-World Example: BuildCo
Let’s say BuildCo lands a $1.5M contract to build an office. The client pays $500K upfront. Under the new rules, that $500K becomes a contract liability—until you earn it by doing the work.
So, if BuildCo completes 1/3 of the work, they’ve only earned $500K. Until that work is done, the cash sits on your books as a liability, not revenue.
What This Means for Your Business
Here’s how these changes can affect your operations:
- Bidding & Planning: You’ll need better insight into when you actually earn revenue to forecast projects more accurately.
- Cash Flow: Correctly identifying assets and liabilities helps you understand your cash flow more clearly.
- Valuation: A company with clean, GAAP-compliant financials is more attractive to lenders, investors, and buyers.
Wrapping It Up
These rules aren’t just about compliance—they’re about clarity. When you understand how and when you’re earning revenue, you can make better business decisions. So whether you’re leading a jobsite or overseeing the books, it pays to understand the numbers behind the work.
Let’s Talk
If your construction firm needs help navigating these changes—or if you want a second opinion on how your current accounting processes stack up—schedule a consultation with our team at J&S Moore Financial Group. We’re here to help you build smarter and grow stronger.
Editor’s Note: From Newsletter to Blog—Why This Topic Matters
This blog post originally appeared as a featured article in a construction industry newsletter, where I broke down new accounting rules that impact how contractors recognize revenue. After receiving positive feedback from readers who appreciated the clarity and relevance, I decided to share it here on the blog to help even more construction professionals stay ahead of the curve. Whether you’re a business owner, project manager, or industry advisor, understanding contract assets and liabilities is key to making smarter financial decisions.
