Latvia issued building permits worth EUR 1.9 billion in 2025, a 12% increase over the previous year driven by infrastructure projects, EU-funded renovation programs, and a residential construction boom in the Rīga metropolitan area. Behind every permitted structure sits a construction company whose accounting looks nothing like a typical trading or service business — because in construction, revenue arrives in stages, costs precede payment by months, and a single misapplied VAT rule can trigger a EUR 50,000 assessment.

This guide covers the accounting specifics that Latvian construction companies must get right: project-based cost tracking, the reverse charge VAT mechanism, subcontractor management, and long-term contract recognition.

Project-Based Accounting: Why It Is Non-Negotiable

A construction company that records all revenue and expenses in a single ledger without project separation is flying blind. Latvian tax authorities expect — and during audits, demand — the ability to trace every cost to a specific project.

Project-based accounting means:

Each construction project gets a unique cost center or project code in your accounting system.
Direct costs (materials, subcontractor invoices, project-specific labor, equipment rental) are assigned to the relevant project.
Indirect costs (office rent, administrative salaries, insurance, general equipment depreciation) are allocated across projects using a consistent method — typically based on direct labor hours, project revenue, or contract value.

The benefit goes beyond compliance. A construction SIA with five active projects might show an overall profit of EUR 80,000 — but project-level analysis reveals that three projects are profitable and two are losing money. Without project accounting, you discover this too late.

Cost tracking in practice:

Issue purchase orders referencing the project code.
Require all supplier invoices to include the project reference.
Track labor hours by project using timesheets — daily, not weekly. Weekly allocations are too imprecise for VID's comfort.
Photograph and document material deliveries to each site. This supports both the accounting records and protects against disputes with clients.

The Reverse Charge VAT Mechanism in Construction

Since 2016, Latvia applies the domestic reverse charge mechanism to construction services. This is not optional — it is mandatory, and getting it wrong creates problems on both sides of the transaction.

How it works:

When a VAT-registered construction company (the subcontractor) provides construction services to another VAT-registered company (the general contractor or developer), the subcontractor issues an invoice without VAT. The recipient self-assesses both output and input VAT in their own VAT return.

Which services trigger the reverse charge?

All services classified under NACE Section F (Construction), including:

Building construction (residential and non-residential)
Civil engineering (roads, bridges, utilities)
Specialized construction (demolition, electrical, plumbing, finishing)
Installation and assembly of prefabricated structures

What does NOT trigger it:

Supply of construction materials without installation (that is a goods sale, standard VAT applies)
Architectural and engineering consulting services (NACE Section M, not F)
Equipment rental without operator
Cleaning services, even on construction sites

The invoice requirements:

A reverse charge invoice must include the notation "PVN apgrieztā maksāšanas kārtība" (reverse charge) and reference Article 142 of the Latvian VAT Law. The invoice shows the net amount and 0% VAT. No VAT amount is stated.

A mistake we see regularly: a construction company providing mixed services (installation of materials it also sells) on a single invoice. The correct treatment is to split the invoice — reverse charge on the installation service, standard 21% VAT on the materials — unless the installation is the principal supply and materials are ancillary. In practice, this determination causes disputes with VID. Document your reasoning.

Subcontractor Management and Compliance

Latvian construction companies rely heavily on subcontractors — often 40–60% of a project's cost flows through subcontractor invoices. The accounting and compliance requirements are substantial:

Subcontractor verification. Before engaging a subcontractor, verify:

Active VID registration (use the VID public database).
Valid VAT registration (critical for reverse charge application).
No tax debts exceeding EUR 150 (VID publishes a debtor list). Paying a subcontractor with significant tax debts can result in joint liability for those debts under certain conditions.
Valid construction merchant or specialist registration with the Building Information System (BIS).

Retention and guarantees. Many construction contracts include 5–10% retention — a portion of each payment withheld until the defects liability period expires (typically 2–5 years). The accounting treatment:

The subcontractor records the full revenue at the time of work acceptance but shows the retention as a receivable.
The general contractor records the full cost but classifies the retention as a payable, due after the guarantee period.

Cash-basis complications. Some smaller subcontractors operate on cash-basis accounting or the micro-enterprise regime. Their VAT obligations and income recognition differ. When your company is accrual-based and your subcontractor is cash-based, the timing of expense recognition can create reconciliation headaches — especially for year-end financial statements.

Long-Term Contracts: Percentage of Completion vs. Completed Contract

Construction projects spanning more than one financial year require a decision about revenue recognition. Latvian accounting standards allow two methods:

Percentage of completion method (recommended for larger contracts):

Revenue and costs are recognized proportionally as work progresses. Progress is measured by:

Cost-to-cost method: Revenue recognized = (costs incurred to date / total estimated costs) × total contract price. Most common in Latvia.
Physical measurement: An independent surveyor measures the percentage of physical work completed.
Milestone method: Revenue recognized when specific contractual milestones are achieved and accepted.

Example: A EUR 2 million contract with estimated total costs of EUR 1.6 million. By year-end, EUR 800,000 in costs have been incurred.

Completion: EUR 800,000 / EUR 1,600,000 = 50%
Revenue recognized: EUR 2,000,000 × 50% = EUR 1,000,000
Costs recognized: EUR 800,000
Gross profit: EUR 200,000

Completed contract method:

All revenue and costs are recognized when the project is complete and accepted. This method defers profit recognition but creates volatile financial statements — a company may show a loss in Year 1 (costs accumulate) and a large profit in Year 2 (everything recognized at once). VID allows this method but prefers percentage of completion for contracts exceeding 12 months.

Loss-making contracts. If the estimated total costs exceed the contract price at any point, the full expected loss must be recognized immediately — regardless of the completion percentage. You cannot defer losses. A contract priced at EUR 500,000 with revised cost estimates of EUR 580,000 requires recognition of a EUR 80,000 loss provision as soon as the estimate changes.

Material Cost Tracking and Inventory

Construction materials typically represent 30–45% of project costs. The accounting requirements:

On-site inventory. Materials delivered to a construction site but not yet installed remain in inventory. They do not become project costs until consumed. A physical inventory count at each site — monthly, at minimum — is necessary to accurately separate purchased materials from consumed materials.

Waste and shrinkage. A 3–7% waste factor is normal for construction materials (concrete, timber, rebar). Anything above that requires documentation and explanation. VID may disallow deductions for excessive waste without supporting evidence (damage reports, weather events, defective materials returned to supplier).

Material purchases from EU suppliers. If you buy materials from suppliers in other EU countries, you self-assess VAT on the intra-community acquisition. The materials enter your VAT return as both output and input VAT in the same period — net effect zero, but failure to report the acquisition is a compliance violation.

Fuel and equipment. Construction equipment (excavators, cranes, concrete mixers) is depreciated over its useful life — typically 5–10 years depending on the asset type. Fuel for construction equipment is a project-direct cost. Fuel for company vehicles (supervisor's car, delivery van) is an indirect cost allocated across projects.

Insurance, Guarantees, and Provisions

Construction accounting requires provisions that other industries do not encounter:

Warranty provisions. Set aside a percentage of contract value (typically 1–3%) for defect remediation during the guarantee period. This provision is deductible for tax purposes when it is based on historical claim rates and documented methodology.
Performance bond costs. Banks charge 1–3% of the bond value annually. These are project-direct costs recognized over the bond period.
Professional liability insurance. Required for construction merchants under the Construction Law. The premium is a deductible business expense.

Common Mistakes in Construction Accounting

Applying standard VAT instead of reverse charge on construction services between VAT-registered companies. The penalty is double assessment — VID charges VAT to the supplier and denies the input deduction to the recipient.
Failing to update cost estimates on long-term contracts. If material prices rise 15% mid-project (as happened with steel in 2022–2023), your completion percentage and profit recognition must be recalculated.
Treating subcontractor advances as expenses. An advance payment is a prepayment asset, not a cost, until the work is performed and accepted.
Ignoring Intrastat obligations. Construction companies importing materials from other EU countries frequently exceed the EUR 340,000 arrivals threshold without realizing it.

Construction accounting demands precision that general-purpose bookkeeping services rarely deliver. If your construction business needs an accountant who knows the difference between a retention and a provision, reach out to our team.

Accounting for Construction Companies in Latvia