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Managing accounts payable in construction: Complete process guide

By ApprovalMax

March 13, 2026

Construction is one of the most invoice-heavy industries on the planet. A single mid-size project can involve dozens of subcontractors, multiple materials suppliers, equipment rental companies, and site service providers - all billing on different terms, different schedules, and different formats.

A lot of construction accounts payable (AP) processes weren't built for that volume. They were built for smaller operations and patched together as the projects got bigger and the supplier list grew longer.

The result is a finance function that spends its time chasing approvals, reconciling duplicate invoices, and fielding calls from suppliers chasing payment, rather than controlling how money actually leaves the business.

On top of this, research from the IOFM shows that processing an invoice by hand costs around $15 on average. When you’re handling payments across multiple projects, this can quickly add up.

In this guide, we’ll break down how construction accounts payable works, why it’s more complex than standard AP, and the best practices companies use to keep payments organized.

We’ll also look at how construction firms manage AP inside QuickBooks and Xero, and how stronger approval controls support broader accounts payable automation best practices.

Key Takeaways

• Tie every invoice to a job and cost code to keep project budgets visible.

• Set payment terms before work begins to avoid disputes and missing documentation.

• Automate invoice processing to cut costs and reduce duplicate payments.

• Track retainage and compliance documents alongside every invoice.

• Layer approval workflows on top of your accounting software to close the gap QuickBooks and Xero leave open.

What is construction accounts payable?

Construction accounts payable is the process of reviewing, approving, and paying invoices connected to construction work. This includes payments to subcontractors, material suppliers, equipment vendors, and service providers.

At first glance, it looks similar to accounts payable in any other business. But construction invoices usually need to be tied to a specific job, contract, or cost code before payment is approved. This means finance teams aren’t just recording expenses, they’re also tracking how each cost affects project profitability.

Given the scale of the industry, that’s no small task. The U.S construction sector alone employs 8.3 million people across roughly 3.7 million businesses (BLS), and each project generates a stream of invoices that need to be reviewed and paid.

Cost types in construction AP

One of the first things construction accounts payable teams manage is cost classification. Expenses generally fall into three groups: direct costs, indirect costs, and overhead.

Direct costs belong to a specific project. These include subcontractor labor, building materials, and equipment used on a job site.
Indirect costs relate to project work but aren’t tied to a single contract, such as temporary site utilities or supervision.
Overhead covers broader business expenses like office rent, insurance, and administrative salaries.

Separating these categories properly helps construction companies measure project margins accurately.

Schedule of values and progress billing

Most construction projects don’t rely on simple net-30 invoicing. Instead, payments follow a schedule of values (SOV). This document breaks the contract price into individual line items representing stages of work.

Subcontractors then submit invoices based on the percentage of work completed for each stage. Industry-standard AIA billing forms such as G702 and G703 are often used for this process. The result is a billing structure that looks very different from traditional supplier invoices.

How AP is recorded in the general ledger

Do you typically record invoices using accrual accounting? When a bill arrives, it’s entered into the accounting system as an accounts payable liability. The expense is then linked to the appropriate project and cost code.

Tracking these liabilities by job is essential. It allows finance teams like yours to see how much the company owes for each project, and plan cash flow around upcoming payments.

Why construction AP is more complex than standard AP

AP becomes more complicated in construction because payments often depend on more than just an invoice. Contracts, compliance documents, and project milestones all influence when and how a bill can be paid. Without strong accounts payable controls, it’s easy to make mistakes.

Retainage and holdback payments

Most construction contracts include retainage, where a percentage of each payment is withheld until work is completed. Around 5-10% of contract value is held back until the final project stage. This protects the project owner if work is incomplete or defects appear.

For AP teams, it means tracking two figures for every invoice; the payable amount and the retained balance.

Lien waivers and compliance documents

Before releasing payment, you might require lien waivers from subcontractors. These documents confirm that suppliers will not place a legal claim against the property once payment is made.

Conditional waivers apply before payment, while unconditional waivers confirm that funds have already been received. Collecting and storing these documents adds another step to the AP workflow.

Vendor compliance and insurance tracking

Subcontractors also need to meet compliance requirements before payment. Contracts may require valid insurance certificates, licenses, or bonds. Accounts payable teams often verify this documentation before invoices move forward. Without those checks, you risk liability or project delays.

Common challenges in construction accounts payable

Even experienced finance teams run into problems when managing accounts payable for construction companies. The problem usually isn’t a lack of process, it’s the number of moving parts involved in each payment.

Managing invoices across multiple job sites

A mid-sized construction project can involve 20 to 50 subcontractors, each submitting invoices tied to different phases of work. Those invoices may come from different job sites, project managers, or suppliers.

Without a clear system, tracking what has been approved, what’s for review, and what has already been paid quickly becomes difficult.

Slow approval workflows and missed discounts

Construction invoices rarely move through a single approver. Project managers verify work, while finance teams confirm numbers and release payment.

Invoices stall when approvals sit in inboxes or shared folders. These steps can lead to missed early-payment discounts and strained vendor relationships, and shrinking project margins. When invoices get stuck, finance loses visibility into committed spend, cost codes get misassigned, and subcontractors start pricing that uncertainty into their next bid or stop bidding altogether.

Construction job vacancies increased from 200,000 to 380,000 between 2017 and 2023 (BLS), highlighting this as a key issue in a sector facing ongoing labor shortages.

Fraud risk and duplicate payments

Manual processes also increase the risk of mistakes. According to Ardent Partners, 57% of invoice data is still manually entered from paper documents. When invoices are retyped or forwarded through email chains, duplicate payments and incorrect entries can slip through the net.

Best practices for managing accounts payable in construction

That being said, construction accounts payable doesn’t have to be complicated. A few practical habits can dramatically improve how invoices move through your organization.

Set clear payment terms for every contract

Start with the contract itself. Payment terms should be clearly defined before work begins, whether that means net-30, net-60, or milestone-based billing.

Why? When terms are unclear, invoices often arrive without the documentation needed for approval. That’s when disputes start appearing between contractors, subcontractors, and finance teams.

Implement multi-step approval workflows

Construction invoices usually require several checks before payment:

Project managers confirm that work has been completed.
Estimators or project accountants verify that the costs match the job budget.
Finance teams then approve the final payment.

41% of companies now use automated invoice approval workflows, highlighting that organizations are increasingly choosing to automate these steps.

Track costs by job and cost code

Does your company depend heavily on job costing? Every invoice should be linked to the correct project and cost code. Typical cost codes might include labor, materials, equipment, or subcontractor services.

When expenses are tracked this way, project managers can see whether costs are drifting away from the budget.

Automate invoice matching and data entry

Manual invoice entry is expensive and time-consuming. Manual processing costs about $15 per invoice, while automation can reduce this to less than $3.

On top of this, three-way matching helps reduce errors by comparing the purchase order, delivery confirmation, and invoice before payment is approved.

Conduct regular AP reconciliation and audits

Construction projects generate large numbers of transactions, so regular reconciliation is essential. Comparing the AP sub-ledger to the general ledger helps uncover duplicate invoices, missing documentation, or coding errors before they affect financial reports.

Monitoring the right accounts payable KPIs can also help you measure whether your AP process is working as expected.

Managing construction AP in QuickBooks

Many construction companies rely on QuickBooks because it offers practical accounting without the complexity of a full ERP system.

QuickBooks Online and QuickBooks Desktop Contractor Edition both support vendor management, job costing, and class tracking. These features make it possible to record project expenses and monitor financial performance across jobs.

However, QuickBooks focuses primarily on accounting rather than approvals. Native approval workflows are limited, tracking requires workarounds, and audit trails are relatively basic. Because of these limitations, many construction firms combine QuickBooks with an invoice approval workflow solution.

Managing construction AP in Xero

Xero is another accounting platform used by construction businesses. It offers bank feeds, tracking categories, and integrations with project management tools, which help finance teams track expenses across multiple projects. Like QuickBooks, it does not include advanced approval routing or construction-specific compliance workflows.

Features such as retainage tracking or lien waiver management typically require additional tools. As your construction company grows, you may add approval automation software to strengthen AP controls.

How approval automation strengthens construction AP

Approval automation can help you introduce structured approval processes without replacing your accounting system. ApprovalMax connects directly to QuickBooks and Xero, adding approval workflows that sit on top of your accounting platform.

Multi-step, role-based approval chains

ApprovalMax allows companies to create approval chains based on role, invoice amount, or vendor type.

For example, a project manager might approve work completion first, followed by a finance review for payment. Today, more than 19,000 businesses use ApprovalMax and we processed 11.62 million bills in 2024.

Project-based approval routing

Invoices can also be routed automatically based on project, cost code, or department. Instead of forwarding invoices manually, the system sends each bill to the right approver. For many organizations, 25% of invoices are approved within two hours and half within one day.

Real-time visibility and audit trails

ApprovalMax records every action taken on a document. This means your team can see when an invoice was submitted, who reviewed it, and who approved it. Customers using automated workflows have reported approval times falling by up to 96% and teams saving around 40 hours per week.

You can learn more about these approval workflows and how they support construction AP processes.

ApprovalMax in action: construction AP results

The practices above aren't theoretical. Here's how two construction companies cleaned up their accounts payable process with ApprovalMax and saw real, measurable results.

BMI Group – Real estate development, Canada (QuickBooks Online)

BMI Group manages multiple real estate development projects across Canada, each operating under its own corporation. Before ApprovalMax, approvals ran entirely through email.

Documents got buried, follow-ups piled up, and with several sign-offs required on virtually every transaction, things moved slowly. Once BMI connected ApprovalMax to QuickBooks Online, all purchase orders, bills, and vendor approvals started flowing through a single portal with clear approval chains. Fifteen people involved in approvals each got back around four hours a week, adding up to two full-time employees saved per month. The company also estimates annual savings of around CAD $200,000, largely because invoices now follow a proper sequence and purchasing issues get caught earlier.

Before the switch, only about half of all purchases followed the correct process. After implementation, that number hit 100%.

BLR Construction – Builder, Australia (Xero)

BLR Provincial Construction is a Melbourne-based builder processing up to 500 bills and invoices every month. The team managed approvals on paper for a long time, which meant constant signature chasing and a finance administrator buried in paperwork. After bringing in ApprovalMax alongside Xero, the average approval time dropped from 3.5 weeks to just 4.5 days, a 74% improvement.

The finance team now saves over 50 hours a month, and the company estimates yearly savings of roughly $22,000 AUD with a 3,400% estimated ROI. Just as importantly, the move to a cloud-based system gave the team clear visibility over project spend and improved communication between departments.

Getting started with ApprovalMax

Getting started with ApprovalMax typically takes only a few steps:

Connect ApprovalMax to your QuickBooks or Xero account
Define approval workflows based on project, vendor, or invoice value
Assign approver roles and approval thresholds
Begin routing invoices through the approval workflow
Monitor approvals using real-time dashboards

You can explore AP automation or start a free trial to see how approval workflows work in practice.

FAQs

What makes accounts payable different in construction?

Construction AP requires invoices to be tied to specific jobs, cost codes, and contracts rather than just recorded as general expenses. On top of that, progress billing, retainage, and compliance documents like lien waivers add layers that don't exist in most other industries.

Can you manage construction AP in QuickBooks or Xero?

Yes. Both platforms support vendor management, job costing, and expense tracking across projects. However, neither includes advanced approval routing or construction-specific compliance features out of the box, so many firms add approval automation software on top.

What is retainage in construction accounts payable?

Retainage is when a percentage of each payment, usually 5 to 10%, is withheld until the project is complete. It protects the project owner against incomplete work or defects, and it means AP teams need to track both the payable amount and the retained balance for every invoice.

How do approval workflows help construction companies?

They make sure invoices are reviewed and signed off by the right people, including project managers, estimators, and finance, before payment is released. Structured workflows reduce the risk of duplicate payments, unapproved spending, and invoices sitting in someone's inbox for weeks.

What is three-way matching in construction?

Three-way matching compares three documents before payment is approved: the purchase order, the delivery confirmation, and the invoice. If all three align, the payment moves forward. This helps catch pricing errors, incomplete deliveries, or incorrect billing before money leaves the account.

Does ApprovalMax integrate with QuickBooks and Xero for construction?

Yes. ApprovalMax connects directly to both QuickBooks Online and Xero, adding multi-step approval workflows, audit trails, and project-based routing on top of your existing accounting setup. There's no need to switch platforms.