Paper Profits and Real Losses in Construction Sector – Accounting Strategy Overhaul for Future Growth of Contractors

Theme: Business Framework; Module: Contractors Strategy

Author: Dr. Pradeep Reddy Sarvareddy

Published Date: 14 Jan 2026

Many Contractors are struggling with losses, delayed payments and cash‑flow problems, yet the Contractors Balance Sheets show Profits. These Profits are just on paper, while in reality, it is a daily rotation with liquidity, vendors payments, MSME Notices, Insolvency threats, and so on. One single negative event, like a Bank Guarantee invocation, and the cash rotation is negatively affected and everything starts collapsing. All these problems arise due to the outdated Accounting practices adopted by the Contractors. Several Contractors are now strategically reworking their Accounting practices and preparing themselves for the future, so that they can also grow as India’s Infrastructure Construction also grows.

Most of the time someone is complaining that Government Contracts are unilateral which deprive Contracts of Profits, yet Contractors bid aggressively and in most types of Tenders the Lowest Price Bid wins. Then Contractors complain about lack of approvals, pending land acquisitions, delayed payments, extra works without payments and pending disputes. Yet, Contractors show profits in their Accounts. How is this possible?

The Accounting System and its secret: “Accrual Basis”

In India, the accounting system is based on “accrual basis” which means that “Income” is “shown in the Accounts” when a Bill is raised, even if the payment is not received. The next aspect is “work in progress” which means that the “Expenditure” is “transferred to a future year”, theoretically to the Year when the payment would be received. NOTE the two “assumptions” clearly. But this is the practice and is allowed by the Income Tax in India.

Example: Consider a project of Rs. 100 Cr. The Contractor completed Rs. 30 Cr work but had incurred expenses to the tune of Rs. 45 Cr. The actual money received by the Contractor was only Rs. 5 Cr. To show profits, the Contractor shows Rs. 30 Cr as Income and transfers Rs. 20 Cr of Expenses to the future. The result = Rs. 30 Cr – Rs. 25 Cr = Rs. 5 Cr profit. But in reality, the Contractor has not yet paid his Vendors or Sub-Contractors, or had to borrow Rs. 20 Cr. Sometimes, Contractors would not even book the bills of the Vendors or Sub-Contractors to reduce the Expenses in that Financial Year. End of the day, it is a vicious game.

Pre‑GST Era

Before GST was implemented in July 2017, fragmented tax regimes (VAT, Service Tax, etc.) and weak oversight let many Contractors to play the game of the Accounting System (i.e., assumed Income and transferred Expenses). But GST changed certain things.

GST Era

As per GST rules (with some exceptions), whenever any Goods were supplied, a Tax Invoice had to be raised, and GST had to be paid. Also, whenever an Income was shown in the Accounts, GST had to be paid. So, Contractors could not bear the double burden of pending payments but yet pay GST. Some Contractors took the risk of not raising Invoices but the Government Departments would not allow that for the most part. This meant that even if the Department did not release the payment or withheld some amount (as Retention Money or something else), the Contractor ended up paying GST. For a few Years, Contractors were able to rotate the Accounts from the Pre-GST era to the Post-GST era, but eventually, the hidden secrets started spilling out. This was one of the reasons for a wave of insolvency of Contractors. At the same time, GST was a look-in-the-mirror truth and slowly Contractors started accepting the truth. GST revealed the hidden truth. Even today, a few Contractors are able to carry over the Expenses to a future year and show some profits, but eventually the truth will catch up.

Even against all these kinds of odds, why do Contractors still undertake Government Works? Why do new persons start Contracting Companies? Why are foreign Contractors entering India?

The short answers are:

Most contractors have invested a lot of money already in Machinery and establishment. It is not easy to quit.
Construction Industry in India is booming and is projected to exponentially increase in the near future and continue so for the next 20 to 30 years at least.
The hope of “one good project” and the Contractor is rich.
Low cost to start a Construction Company as almost everything can be rented or taken on Credit.
Some other general factors.

But the ugly truth is: Today the Contractors are going broke. Many have closed their Companies, some are in liquidation, others are fighting. They just keep pushing forward “may be the next project” or “at least our Country is benefitting” or “other sentimental” reasons.

Personally, I had interacted with a few Government Engineers who, after their retirement, started Construction Companies as they “knew” the construction world in which they had worked for more than 30 years before retiring and also as a future business for their children. Within 3 years or so, all the retired Government Engineers (including some retired Chief Engineers) confided that they “did not know” the other side of construction world and were struggling. They wanted to quit as a Contractor.

So, what next?

The construction sector is too large to exit but too dangerous to operate as before. Survival requires strategic adaptation. Flourishing requires emotional adaptation. Here are a few factors to consider.

Change yourself and prepare for the future.
Better Cash Management, internally and externally.
Select your Projects carefully.
One bad project is enough to ruin the last 10 years progress.
It’s a complicated world now. Engage different specialists like Engineers, Financial Advisors, Construction Managers, Advocates and whoever you need.
Finally, become different and specialised. Only specialists will be the future. Learn from developed Countries. Technology will not magically take over. Artificial Intelligence will not control everything. Robots will not build structures. But, learn the new techniques, means, methods, technology and whatnot.

Do not take risks. But take “calculated” Risks. Afterall, Risk is your DNA.