Work in Progress (WIP) in Construction: How it Works

Work in Progress in construction, also referred to as WIP, is the lens through which construction companies view their financial health, project progress, and potential risks before they materialize.

WIP accounting serves as a real-time health check in an industry like construction, where profit margins can be thin and delays costly. It tracks the value of work completed but not yet billed or paid, helping contractors, project managers, and executives to make informed decisions throughout a project’s lifecycle.

In this article, we’ll explore WIP construction, how it works, the step-by-step calculation process, its advantages and pitfalls, and how Porte Brown helps contractors use WIP reports as strategic tools.

What Is WIP in Construction?

WIP construction represents the total value of work performed on a project that has not yet been invoiced or collected.

Instead of only recognizing revenue upon project completion, WIP construction accounting provides an ongoing snapshot of a project’s financial standing. This is particularly important for long-term contracts, where project timelines often extend over months or years.

Work In Progress construction accounting is critical because it:

• Reflects the true economic activity taking place
• Highlights whether jobs are overbilled or underbilled
• Supports compliance with accounting standards and tax regulations

By using WIP accounting, contractors avoid “profit fade” surprises—when projected profits erode as a project nears completion. Proactive WIP tracking reveals these trends early, allowing time for corrective action.

How Does WIP in Construction Work?

WIP in construction accounting compares a project’s financial metrics, such as contract value, costs to date, earned revenue, and billed amounts, to determine its financial position at a given point in time.

Construction companies typically prepare WIP schedules monthly or quarterly. This frequency ensures that current data, not outdated estimates, inform financial statements and operational decisions. A well-maintained WIP schedule also helps forecast cash flow and identify potential problem areas before they escalate.

The WIP schedule process generally involves:

• Reviewing the original contract value plus any approved change orders
• Recording costs incurred to date, including labor, materials, subcontractor fees, and allocated overhead
• Calculating the percentage of completion using the cost-to-cost method
• Determining earned revenue and comparing it to amounts billed
• Identifying whether the job is overbilled (liability) or underbilled (asset)

Some contractors integrate project management software with accounting systems to automate these steps, reducing errors and improving real-time visibility. 

What Should Be Included in a WIP Report?

A comprehensive WIP report captures project details, financial progress, billing status, profit projections, and other key metrics, providing a clear and actionable view of job performance.

Here are the components of a WIP report in more detail: 

• Project identification: Name, job number, and contract type
• Contract value: Including original scope and approved change orders
• Costs to date: Direct and indirect costs recorded so far
• Percentage of completion: Based on cost-to-cost or other recognized methods
• Earned revenue: Revenue recognized to date under the percentage-of-completion method
• Billed to date: Amount invoiced to the client so far
• Overbilling/underbilling amount: Difference between billed and earned revenue
• Estimated cost to complete: Projection of remaining costs to finish the job
• Projected profit or loss: Current estimate based on costs and revenue projections

Well-structured WIP reports also track historical trends, making identifying recurring issues across projects easier.

How to Calculate WIP Accounting in Construction

WIP accounting is most commonly performed using the percentage of completion method. This aligns revenue recognition with the actual progress of the job, making financial reports more accurate and relevant.

Step 1: Calculate Percentage of Completion

Percent Complete =  Costs to Date/ Total Estimated Costs

This step determines the project's progress in terms of cost expenditure.

Step 2: Calculate Earned Revenue

Earned Revenue = Contract Value × Percent Complete

Earned revenue is the amount you’re entitled to recognize based on work performed.

Step 3: Compare Earned Revenue to Billed Amounts

• If billed > earned → overbilling (liability)
• If billed < earned → underbilling (asset)

This method also supports better tax planning. 

What Is an Example of WIP in Construction?

An example of WIP in construction is a $1,000,000 project that’s 50% complete, earning $500,000 in revenue.

Imagine your company is building a $1,000,000 office for a fast-growing tech firm—a sleek, three-story space with wood ceilings, exposed steel, glass curtain walls, and a rooftop terrace. 

The example WIP amounts break down like this:

• Total estimated costs: $800,000
• Costs incurred to date: $400,000
• Billed to date: $450,000

Step 1: Percentage complete:

$400,000/ $800,000 ​= 50%

Step 2: Earned revenue:

$1,000,000 × 50% = $500,000

Step 3: Compare billed to earned:
Earned: $500,000
Billed: $450,000
Difference: $50,000 underbilled

This means you’ve delivered more work than you’ve invoiced for—potentially straining cash flow.

Another scenario: If billed to date were $550,000 instead, the job would be $50,000 overbilled, meaning you’ve collected more than the earned value of the work performed. While this may improve short-term cash flow, it can lead to revenue shortfalls in the long term.

Benefits of WIP Accounting in Construction

From controlling costs and improving billing accuracy to enhancing project management and mitigating risks, WIP accounting directly impacts profitability and long-term success in the construction business. Beyond a record-keeping exercise, it’s a proactive management tool that connects financial data to operational decision-making. 

Cost Management

By monitoring costs against the budgeted value for work completed, WIP accounting enables contractors to spot early warning signs of overruns. For example, if material costs rise faster than anticipated, adjustments can be made to procurement timelines, supplier negotiations, or project scope. This insight helps keep projects financially viable and avoids margin erosion before the problem escalates.

Revenue and Reporting Accuracy

Matching revenue to the actual work performed ensures financial statements remain accurate and dependable. This accuracy is crucial for stakeholders, including lenders, bonding companies, and investors, who rely on consistent reporting. With precise revenue recognition, businesses can evaluate project profitability at any stage rather than waiting until completion.

Effective Project Management

A detailed WIP report aligned with the project schedule allows managers to identify bottlenecks, shift resources, and prioritize tasks effectively. The connection between progress data and cost data ensures operational changes are backed by financial reality, leading to better decision-making.

Billing Accuracy

Accurate billing practices maintain a healthy cash flow and foster client trust. WIP accounting helps ensure that invoices accurately reflect the value of work performed, thereby avoiding disputes and reducing the risk of payment delays.

Risk Mitigation

By catching discrepancies early, whether in costs, billing, or scheduling, WIP accounting reduces the risk of disputes, enhances bonding capacity, and supports a company’s professional reputation. This proactive method of accounting strengthens resilience in uncertain economies. 

Common Mistakes in Construction WIP

Even experienced firms can make WIP errors that impact cash flow and financial reporting, like inaccurate data entry or overlooked change orders and billing imbalances. These common mistakes compromise financial accuracy, weaken transparency, and hinder effective project oversight; therefore, it’s essential to be aware of them and implement systems to prevent them.

Overbilling and Underbilling Issues

Overbilling may offer a temporary cash flow boost but can leave a project vulnerable to revenue shortfalls later, especially if progress slows or costs increase unexpectedly. On the other hand, underbilling delays revenue collection and can create funding gaps for ongoing work. Both scenarios can be avoided with disciplined WIP schedule construction monitoring.

Inaccurate Data Entry and Reporting

Minor data entry errors, such as misclassifying costs or omitting an expense, can skew percentage calculations, leading to misaligned revenue recognition. A consistent review process and integrated accounting software can help minimize these errors.

Failure to Update Estimates and Change Orders

Construction projects evolve. If estimates aren’t updated or change orders aren’t incorporated promptly, WIP calculations will not reflect the project’s actual status. This can lead to unrealistic profit forecasts and uninformed business decisions.

Lack of Transparency

When accounting teams, project managers, and executives operate from different data sets, inconsistencies arise that harm reporting accuracy and decision-making. Implementing centralized WIP reporting tools ensures everyone is working with the same up-to-date information, creating a unified financial perspective.

Porte Brown's Approach to WIP Management

Porte Brown delivers a comprehensive WIP management service tailored to the needs of construction firms:

• Detailed WIP analysis across all active projects
• Custom-built WIP schedules aligned with your business model
• Proactive variance tracking to catch billing and cost issues early
• Integration with tax and compliance strategies for holistic financial health

By working with Porte Brown, you get a partner committed to your profitability and growth. Contact us today to get started.