The Essential Guide to Construction Work in Progress (WIP)

By

Josh Krissansen

Last Updated Feb 4, 2026

By

Josh Krissansen

Most construction financial problems don’t explode overnight — they drift quietly until month-end, when it’s too late to fix the damage. Work-in-progress (WIP) accounting changes that dynamic. 

When WIP is grounded in field data and forward-looking forecasts, it becomes a powerful early-warning system. Firms gain tighter control over cash, clearer visibility into margin movement, and stronger financial credibility with banks, bonding providers, and investors.

In this guide, you’ll learn how to build an accurate WIP report, how to read it properly, and how to avoid the mistakes that distort performance and weaken financial stability.

What Is Construction Work in Progress (WIP) Accounting?

Construction work in progress (WIP) accounting is a project performance system that records the value of incomplete work as an asset through an instrument known as the Construction in Progress account (‘CIP’).

A construction work-in-progress (WIP) account captures both direct costs, such as labour, materials, and subcontractors, as well as indirect costs, including overhead, insurance, and site supervision. 

As such, it’s used by:

• Commercial builders
• Subcontractors
• Construction managers
• Any contractor delivering projects for clients

WIP account is about delivery performance, not asset valuation, and its purpose is to:

• Track whether a job is ahead or behind financially, using core components that include contract value, estimated costs, actual costs to date, percentage complete, earned revenue, and total billings.
• Measures overbilling/underbilling, cost-to-complete, earned revenue, forecasted margin, etc.
• Feeds into monthly financial reporting and cash flow management.

WIP enables revenue to be recognised progressively through the percentage of completion, which aligns financial statements with operational progress. This connection links costs incurred, earned revenue, and amounts billed so that leaders can assess their financial position in real-time.

The two terms — CIP and WIP — often get confused, and understandably so. However, they’re both completely different tools in construction finance. CIP is a balance sheet asset account used by developers, government agencies, and companies building their own facilities, among others. 

However, its purpose is vastly different and doesn’t concern project profitability, but rather, is about asset creation. CIP is used to:

• Track capital expenditure on an asset being built.
• Costs are allocated to CIP until the asset is complete, then transferred to “Buildings,” “Plant,” etc., and begin to depreciate.

For example: a residential builder developing a housing estate records concrete, framing materials and trade labour in the Construction in Progress account. These costs remain as assets until the homes are completed and handed over, at which point they are transferred to the cost of goods sold.

Why WIP Accounting Matters for Construction Teams

Work-in-progress reporting connects site progress with financial performance, allowing leaders to see real-time profitability, cash flow position, and emerging project risks.

The stakes are high; 40% of subcontractors retain half to all profits in the business just to fund operations, limiting their ability to reinvest in growth.

Accurate WIP prevents margin erosion by showing whether progress, costs and billings are aligned across every project. These insights support stronger financial stability, better cash flow control and improved confidence from lenders.

Financial Accuracy and Auditability

WIP tracks actual revenues and costs, ensuring that financial statements accurately reflect true performance across the portfolio. It provides the audit trail required by lenders, bonding providers and external auditors, allowing them to verify recognised revenue and earned value.

This structure supports percentage-of-completion revenue recognition by linking budget, progress, and cost consumption.

Accurate WIP also strengthens forecasting by showing real-time cost performance against updated estimates. Given the high rate of cost overruns globally, maintaining precise WIP records is essential for accountability.

For example: Lenders rely on detailed WIP schedules to confirm that recognised revenue is tied to actual progress rather than optimistic projections.

Cash Flow Impact on Overbilling and Underbilling

The WIP indicates whether billings align with earned revenue, revealing whether the contractor or the client is financing the project.

Overbilling accelerates cash inflow but may hide incomplete work that must be delivered later. Underbilling delays payment for completed work and strains working capital. Early visibility allows billing cycles to be adjusted before they affect cash flow.

Here's what that looks like in practice:

• Overbilling

  A mechanical contractor bills monthly progress payments based on scheduled milestones but encounters equipment delivery delays. They've billed for work not yet performed, creating a liability that gets worked off in future periods. Cash comes in faster, but the contractor owes that work.

• Underbilling

  An electrical contractor completes significant rough-in work but delays billing until the next payment application cycle. They've financed the client's project for weeks, reducing available cash for other jobs.

Risk Visibility and Decision-Making

WIP acts as an early warning system for cost overruns, schedule delays and scope changes. It supports operational decisions such as where to deploy supervision, when to negotiate a variation and which projects require immediate intervention.

Portfolio-level visibility allows leaders to assess margin performance, client reliability, and overall workload planning. By linking financial outcomes with program impacts, WIP supports scenario planning and resource allocation at both the project and portfolio levels.

Integrated digital tools enhance this visibility by detecting anomalies in progress, costs or billings that manual reviews may miss.

What a Construction WIP Report Includes

A WIP report provides a snapshot of all ongoing projects at a specific point in time, typically generated monthly to align with billing cycles. The core components include:

• ---

  Contract value

  Total amount the client will pay, including approved change orders

• ---

  Estimated cost at completion (ECAC)

  Total projected costs to finish the project, updated to reflect scope changes and actual cost trends

• ---

  Estimated gross profit

  Contract value minus ECAC

• ---

  Costs incurred to date

  Actual expenditures recorded in the CIP account

• ---

  Percentage complete

  Calculated by dividing costs incurred by ECAC

• ---

  Earned revenue to date

  Total amount invoiced to the client

• ---

  Billings to date

  Total amount invoiced to the client

• ---

  Over/underbilling

  Earned revenue minus billings to date

• ---

  Cost to complete

  ECAC minus costs incurred to date

Here's what a single project line looks like in a WIP report:

In this case, the project is 60% complete but underbilled by $25,000. The contractor has financed this work and can submit a progress claim to bring the project up to date.

3-Step Process to Calculate WIP in Construction

The work-in-progress calculation follows a three-step process that displays project progress, earned revenue, and whether the job is overbilled or underbilled. It relies on accurate job costing data, current estimates to complete, and the percentage of completion method used across Australian commercial construction.

Step 1: Calculate Percent Complete

Percent complete is calculated using the formula:

This cost-to-cost method compares incurred costs with the total expected cost of delivery. Teams may also use units complete or cost to finish estimates when measured quantities provide a clearer indication of progress. This calculation must reflect approved variations, market price changes and productivity shifts.

Percent complete is the foundation for earned revenue and billing alignment.

For example: a plumbing contractor installing systems in a new hospital wing with a total estimated cost of $800,000 and $480,000 spent to date is 60% complete.

Step 2: Calculate Earned Revenue

Earned revenue is calculated using the formula:

Earned Revenue equals Percent Complete multiplied by Total Contract Value

This represents the revenue the contractor has earned for work performed, regardless of billing status. It supports percentage-of-completion revenue recognition by tying revenue directly to progress, allowing teams to assess profitability in line with expectations.

For example: if a $1 million contract is 60% complete, the contractor has earned $600,000 in revenue based on the work completed.

Step 3: Determine Overbilling or Underbilling

Overbilling or underbilling is determined using the formula:

Over or Underbilling equals Billings to Date minus Earned Revenue

A positive result indicates overbilling, where billings exceed earned revenue, creating a liability. A negative result suggests underbilling, where earned revenue exceeds billings and creates an asset.

This calculation determines whether billing cycles align with progress and identifies potential cash flow risks. 

For example: if earned revenue is $600,000 and billings to date total $550,000, the project is underbilled by $50,000, and the contractor is financing that portion of work.

Two Revenue Recognition Methods for Construction WIP

Construction companies select revenue recognition methods based on contract type, project duration and accounting standards. The two primary approaches are the percentage-of-completion method and the completed-contract method. 

Understanding both methods helps contractors determine which approach provides the most accurate financial reporting for each project.

#1: Percentage of Completion Method

What it is…

• Required for most long-duration contracts under ASC 606 and is preferred in Australian commercial construction for its financial visibility.

Why it’s used…

• Recognises revenue and costs progressively based on the percentage of work completed. 

How it works…

• Provides continuous insight into project profitability and relies on accurate estimation of total costs, along with frequent updates on the percent complete. 

By aligning revenue recognition with actual progress, the percentage of completion method supports timely corrective action when costs or productivity deviate from plan.

#2: Completed Contract Method

What it is…

• Recognises revenue and costs only when the project is fully completed and handed over. 

Why it’s used…

• Typically, for short-duration projects or where outcomes are uncertain, progress measures are unreliable.

How it works…

• Creates large swings in income between reporting periods because revenue is recognised in a single event.
• Minimises the administrative effort associated with regular WIP updates, although it compromises visibility into margins during delivery.

Note that this method is more straightforward than the percentage-of-completion method, but it provides no interim insight into financial performance.

8 Common WIP Accounting Mistakes and How to Avoid Them

WIP accuracy depends on disciplined processes and the timely capture of data. These common issues can distort financial statements and hide margin erosion across the portfolio.

1) Incomplete or Inaccurate Cost Capture

Missing labour, materials or subcontractor costs, along with miscoded entries, create an incorrect view of progress. This distorts the percent complete and earned revenue, weakens financial reporting, and can mask an emerging margin fade.

Avoid inaccurate cost capture by using mobile time entry, equipment logs and material receipts, and enforce consistent cost coding across all teams.

2) Infrequent ECAC Updates

Outdated cost estimates that ignore approved variations, market movements or productivity shifts create misleading progress and profit visibility. These inaccuracies undermine forecasting and delay corrective action.

Maintain accurate ECAC by regularly updating estimates and integrating change management, allowing approved variations to adjust forecasts automatically.

3) Ignoring Committed Costs

Excluding purchase orders or subcontracts that are not yet invoiced understates true progress and produces unreliable WIP outcomes. This disconnect often results in late recognition of cost pressure and incorrect margin reporting.

Strengthen WIP accuracy by tracking committed costs alongside actuals through an integrated financial platform that rolls purchase orders and subcontract commitments into WIP in real time.

4) Inconsistent Reporting Periods

Irregular WIP cycles or mismatched month-end dates make trend analysis unreliable and weaken portfolio visibility. These inconsistencies prevent leaders from seeing early signs of financial stress.

Improve reliability by aligning WIP reporting with billing cycles and month-end close, ensuring that every project is assessed on a consistent schedule.

5) Not Addressing Overbilling or Underbilling Promptly

When billings drift away from earned revenue, cash flow strain and inaccurate forecasts follow. This increases financial exposure and complicates compliance reviews.

Prevent billing misalignment by using progress billing tools that compare earned revenue with billings automatically and highlight discrepancies early.

6) Lack of Collaboration Between Field and Office

Progress and cost data captured in silos prevent WIP from reflecting actual site performance. This disconnect leads to incorrect percent complete, inaccurate earned revenue and delayed corrective action.

Improve collaboration by connecting field updates, job costing and forecasting in one platform so project managers and finance teams work from the same real-time data.

7) Misinterpreting Percentage of Completion

The incorrect application of the percentage of completion method leads to inaccurate revenue recognition and unreliable financial statements. This reduces confidence in reported performance and increases audit scrutiny.

Ensure accuracy by applying a consistent cost-to-cost method supported by integrated tools that calculate percent complete using both actual and committed costs.

8) Lack of Detailed Supporting Notes

Missing explanations for assumptions, scope changes or measurement methods weaken confidence in the WIP schedule. Without this context, stakeholders cannot validate forecasts or understand changes in performance.

Strengthen transparency by standardising documentation practices and recording assumptions, scope adjustments and progress measurement methods within each WIP cycle.

Best Practices to Simplify WIP Accounting

Effective WIP accounting relies on disciplined processes supported by connected construction technology that keeps costs, progress, and billing aligned in real-time.

These practices strengthen financial control, improve visibility across the portfolio and ensure decisions reflect current project conditions.

Run WIP Reports on a Regular Cadence

WIP accuracy depends on a consistent reporting schedule.

Align reporting with monthly billing cycles and the financial close to provide leaders with a consistent view of performance across all projects. Assign clear ownership for updating costs, reviewing percent complete and reconciling billings so responsibilities are understood and executed on time.

A structured monthly checklist supports this consistency, ensuring the WIP process is complete and reliable. The checklist typically includes:

• Updating direct costs, including labour, materials, subcontractors and equipment
• Reviewing and approving change orders
• Updating ECAC based on current project conditions
• Assessing percent complete using cost-to-cost or units complete
• Calculating earned revenue and overbilling or underbilling
• Preparing the next progress billing based on underbilled amounts
• Reviewing WIP with project managers and executives

Schedule monthly cross-functional WIP review meetings to analyse trends, margin movement and corrective actions.

For example: a contractor may require project managers to submit forecast updates by the 5th of the month, close costs by the 10th, and complete an executive WIP review by the 15th, so decisions rely on current financial data.

Use Connected Construction Accounting Software

Connected software provides a single source of truth that links field operations, project management and accounting. This integration captures labour, material, and equipment costs in real-time, automates key WIP calculations, and reduces the manual effort that causes errors.

Modern platforms strengthen WIP processes by providing the following capabilities:

• Automated percent complete, earned revenue and overbilling or underbilling calculations
• Integrated change management so approved variations update contract value and ECAC
• Tracking of committed costs, including purchase orders and subcontracts not yet invoiced
• Role-based dashboards for site teams, project managers, finance and executives
• Portfolio-level visibility that consolidates project data in real time
• Audit-ready reporting with alerts for duplicate entries, unexpected cost fade or billing discrepancies

For example: a mid-sized contractor using an integrated platform can reduce month-end WIP preparation from several days to one day, providing executives with real-time visibility into financial performance across all active projects.

Standardise Percent Complete and ECAC Updates

Consistency in percent complete and ECAC updates is essential for accurate WIP. A standardised method ensures forecasts remain comparable across projects and prevents outdated assumptions from influencing financial performance.

A disciplined monthly forecasting workflow supports this consistency, providing project teams with a repeatable structure for preparing accurate projections. The workflow typically includes:

• Refreshing ECAC
• Confirming productivity assumptions
• Reconciling committed costs
• Aligning approved variations and change events
• Updating percent complete
• Reassessing cost to complete

Link forecasting approvals directly to WIP preparation to maintain accuracy across the full reporting cycle, and hold monthly forecast reviews with project managers and executives to identify emerging margin risk early.

For example: a commercial builder may require project managers to update forecasts by the fifth of each month and review changes with executives by the tenth, ensuring WIP reflects current project conditions and exposes margin movement early in the quarter.

Strong WIP accounting protects margin and strengthens financial control

WIP accounting connects job cost, progress, and billing so leaders can see how projects are performing before issues surface at month-end. 

Consistent forecasting, accurate percent complete, and connected financial data improve margin visibility, cash flow management, and confidence in reported results across the portfolio.

Written by

Josh Krissansen

53 articles

Josh Krissansen is a freelance writer with two years of experience contributing to Procore's educational library. He specialises in transforming complex construction concepts into clear, actionable insights for professionals in the industry.

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