The construction industry is a complex field that relies on precise accounting practices to maintain financial stability and facilitate growth. In contrast to traditional accounting, which often centers on routine, day-to-day business operations and transactions, construction accounting is primarily project-oriented, with expenses being assigned to specific contracts. Not only this, but contracts are often long-term, spanning multiple accounting periods and involving fluctuating material and labor costs.
As such, effective, accurate work in progress (WIP) accounting is a crucial component of construction business management. To help mitigate the risks associated with managing WIP projects, construction companies can leverage outsourced accounting. These services can enable construction companies to manage their finances effectively, reduce costs and focus on their core business activities.
What Is “Work in Progress” (WIP) in Construction Accounting?
WIP refers to the value of work that has been performed on an active construction project but has not yet been fully billed or completed. Because construction contracts frequently span multiple accounting periods, revenue cannot simply be recorded when a project wraps up. Instead, WIP accounting recognizes revenue and costs as the work is performed, tying financial results to each job's actual stage of completion.
What Is a WIP Report in Construction?
Rather than waiting for project completion, a WIP report (also referred to as a WIP schedule) represents the status of construction projects that are currently underway but have not yet been completed. Construction WIP reporting often combines a record of the direct labor, materials, subcontracting costs and allocated overhead associated with the construction project as it is performed, offering visibility not only into the individual projects but also into the company's overall financial health.
What Should a WIP Report Include?
For each open job, the WIP report should include the following:
- Total Contract Amount
- Estimated Costs to Complete
- Estimated Profit and Profit Percentage
- Actual Costs to Date
- Billings to Date
- Project Percent Complete
- Revenue Recognized
- Over/underbilling
- Backlog Revenue
Why Is WIP Accounting Important for Construction Companies?
Due to all the job costing data required, managing WIP projects are vital for the business, and reporting can significantly affect the accuracy of revenue recognition and profits. For instance, if a company underestimates the cost of a WIP project, it may lead to inaccurate revenue reporting and lower profits. On the other hand, overestimating the cost of a project may lead to overcharging clients, which can damage a company's reputation.
Additionally, construction companies looking to receive funding from a lender or investor will need to see timely and accurate WIP reporting to understand how current projects are tracking as required by U.S. GAAP.
Calculating WIP for Construction Accounting
While the math for calculating WIP is straightforward, its accuracy relies on complete cost data and a reliable estimate of the remaining costs to complete the job.
Ways To Calculate WIP
Different methods for calculating WIP include:
- Percentage of Completion: Recognizes revenue and expenses as work progresses based on the percentage of the project completed. This method aligns financial reporting with the actual progress of the job.
- Units Complete: Measures project progress based on completed units, milestones or deliverables rather than costs incurred.
- Cost-to-Finish: Evaluates project progress by comparing costs incurred with the estimated costs remaining to complete the job.
Example WIP Calculation Using Percentage of Completion
WIP is most commonly calculated using the percentage of completion method. To put this into practice, consider a contractor working on a $1 million commercial project with total estimated costs of $800,000. To date, the company has incurred $200,000 in costs and billed the client $300,000.
- Determine the percentage of completion by dividing the costs to date by the total estimated costs: $200,000 ÷ $800,000 = 25% complete.
- Calculate the earned revenue by multiplying the contract value by the percentage of completion: $1,000,000 × 25% = $250,000 earned.
- Compare billings to earned revenue: The contractor has billed $300,000 but earned only $250,000 — a $50,000 overbilling.
In this scenario, billed amounts exceed earned revenue, so the contractor is overbilled — a position that seemingly looks good for cash flow today but represents work still owed to the client. Had billings come in below $250,000, the company would be underbilling and effectively financing the project out of its own pocket.
Common WIP Accounting Challenges Construction Companies Might Face
Even with a sound process in place, WIP reporting is only as reliable as the data behind it. Small errors compound quickly, distorting margins and masking problems until a job is nearly complete. Some of the most common pitfalls include:
- Incomplete or Inaccurate Cost Tracking: When costs (e.g., subcontractor and committed costs) aren't captured in the right period, percent-complete and earned-revenue figures are thrown off from the start.
- Data Entry Errors: Manual spreadsheets are prone to transposed figures, broken formulas and outdated inputs that ripple through the entire schedule.
- Running Reports Too Infrequently: WIP is a real-time management tool, so updating it only at month- or quarter-end leaves little room to course-correct before small overruns become losses.
- Treating Overbilling as Profit: Billing ahead of completed work can look like a healthy cash position, but overbillings are a liability (revenue not yet earned), not additional margin.
- Delayed Expensing: Recording costs late understates a project's true stage of completion and overstates profitability in the current period.
- Failing To Reconcile WIP With Financial Statements: When the WIP schedule doesn't tie back to the balance sheet and profit and loss statement, overbillings and underbillings can go unnoticed and financial reporting loses its integrity.
How Outsourced Accounting Services Can Help
Many of these challenges stem from limited accounting capacity or reliance on manual systems, but those are gaps outsourced accounting services are well positioned to close. By pairing construction expertise with purpose-built processes and technology, an outsourced team can turn WIP reporting from a monthly scramble into a reliable decision-making tool.
Outsourced accounting services can help construction companies:
- Find Certified Accounting Talent: Outsourced accounting services provide a team of experienced and professional accountants who not only specialize in the construction industry and know how to capture costs accurately and apply the right revenue recognition method.
- Use Accurate Accounting Methodologies: Many construction companies still manage their WIP schedules on basic systems like Excel, which may be time-consuming and contain inaccurate data. Outsourced accounting services can help construction companies improve or set up a more robust system — whether on QuickBooks or Sage 300 CRE — so reports are updated on a regular cadence and reconcile to the general ledger.
- Keep WIP Aligned With Financial Reporting: Outsourced professionals reconcile the WIP schedule with the balance sheet and profit and loss statement, treating overbillings as liabilities rather than profit and maintaining that financial statements present an accurate picture.
- Secure Bonding/Funding for the Next Project: Outsourced accounting professionals can help construction companies develop accurate, up-to-date, and forward-looking financial reports that instill confidence in lenders and investors through accurate information about WIP projects.
- Fix Cash Flow Problems: Since WIP schedules represent projects not yet finished and, therefore, not yet paid for, construction companies often face difficulty managing their cash flow. Outsourced accounting services can assist companies to provide the accurate financial reports that enable them to make informed financing decisions.
Your Guide Forward
Cherry Bekaert’s Outsourced Accounting Services can help construction companies strengthen WIP reporting by improving project coding, tracking costs, managing retainage and aligning expenses with financial reporting. With clearer visibility into project performance, management can make more informed decisions and better prepare for lender and compliance requirements.
Based on our construction and real estate industry experience and access to tools such as Sage Intacct for Construction and Sage 300 CRE, Cherry Bekaert can also evaluate existing systems, recommend integrations and support more efficient reporting processes. These tailored solutions help construction companies reduce accounting challenges, streamline procedures and move toward more accurate financial analysis.
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