The Role of Work in Progress (WIP) in Construction COGS
- Cost Construction Accounting
- Apr 14
- 5 min read
Updated: Sep 19
In the construction industry, tracking Work in Progress (WIP) isn't just a good practice, it's a necessity. When you're juggling multiple projects, each at different stages, mismanaging WIP can lead to skewed construction COGS, inaccurate profit margins, and even cash flow issues.
This article breaks down what work in process construction means, how it integrates with your construction accounting, and why it’s vital for accurate financial reporting and project management.
Table of Content:
What Is Work in Progress (WIP) in Construction?
Work in Progress (WIP) refers to the value of construction projects that are underway but not yet completed. It captures both labor and materials that have been used but not yet billed to the client. WIP sits in a transitional state, neither inventory nor a finished job and making it crucial to track both job costing in construction and accurate financial reporting.
Why Is WIP Important?
It impacts your construction COGS.
It determines revenue timing via the percentage of completion method.
It helps prevent over/under billing.
It identifies project profitability in real-time.
If your WIP isn't calculated properly, you may be recognizing revenue too early or too late, and underreporting or overreporting profits.
How WIP Affects Construction COGS
Your Cost of Goods Sold (COGS) includes all direct costs associated with a specific project labor, materials, subcontractors, etc. When you're dealing with multiple ongoing jobs, COGS becomes dynamic. That’s where WIP adjustments come into play.
WIP and COGS Relationship
WIP influences how much of your expenses are moved to COGS during an accounting period. Consider this example:
When you're overbilled, you’ve received more money than the work you've performed. When underbilled, you’ve done more work than you've billed for. Both scenarios require a WIP adjustment to accurately reflect revenue and expenses.
How to Track and Report WIP Accurately
Step 1: Maintain an Accurate WIP Schedule
The WIP schedule is the cornerstone of effective construction project management and financial accountability. It’s a detailed report tracking each active job’s critical financial components to calculate revenue recognition and billing status.
Here’s what a typical WIP schedule accounting table should include:
Maintain this schedule monthly to avoid unpleasant surprises and stay aligned with your cash flow and tax planning.
Step 2: Calculate Percentage of Completion
The most widely used method in construction accounting is the Cost-to-Cost method. It’s calculated as:
Percentage Complete = Costs Incurred to Date ÷ Total Estimated Costs
Let’s break it down with a simple example:
Total Contract Value: $500,000
Costs Incurred So Far: $200,00
Estimated Total Costs: $400,000
Percentage Complete = 200,000 / 400,000 = 50%Revenue Recognized = 50% × $500,000 = $250,000
If you have billed $300,000, you are overbilled by $50,000. If you have billed $200,000, you are underbilled by $50,000.
This calculation provides a more accurate picture of project finances, helping construction firms monitor project progress and avoid negative cash flow or misleading profit margins.
Step 3: Reconcile with Your Financial Statements
After preparing your WIP schedule and calculating earned revenue, reconcile these figures with your accounting system and financial reports.
Adjustments include:
1. Revenue
Compare Revenue Recognized (from WIP) to your actual billings.
If revenue is higher than billings → Underbilled (you’ve earned more than you’ve billed).
If revenue is lower than billings → Overbilled (you’ve billed more than you’ve earned).
You need to post journal entries to adjust revenue accordingly usually as either:
Deferred Revenue (Liability) for overbilled jobs
Unbilled Revenue (Asset) for underbilled jobs
2. Construction COGS
Ensure COGS reflects only the costs related to work completed, including direct labor and material costs, excluding costs for future work or materials in inventory.
3. Job Profitability Reports
Update job costing reports with WIP adjusted revenue to provide a true picture of job performance and profit margins, which informs future project prioritization and resource allocation.
Common Questions Contractors Ask
1. What if I don't track WIP?
You risk misleading financial reports. This can lead to poor decisions, IRS scrutiny, and cash flow surprises.
2. Should I do WIP monthly or quarterly?
Monthly is best. If your projects are long-term or billing-heavy, monthly WIP tracking ensures you're not blindsided.
3. Can software help with WIP?
Yes! Software like QuickBooks, Buildertrend, or CoConstruct has WIP tracking features. But human judgment is still key in estimating costs and timelines.
Best Practices for Managing WIP
Review project budgets regularly
Adjust estimates when costs change
Reconcile billings and costs monthly
Involve your project managers—they often know what's actually going on in the field
How Construction Cost Accounting Can Support You
If you’re doing this on your own, start by building a simple WIP schedule accounting template in Excel. Make it part of your monthly close. Get your PMs involved and review your reports regularly.
But let’s be honest! WIP isn’t easy. If you’re wearing multiple hats, from estimating to billing to managing subs, it’s easy for things to fall through the cracks.
That’s where our team at Construction Cost Accounting can help.
We specialize in construction bookkeeping, job costing in construction, and WIP management. We make sure your books reflect reality—not just numbers on a screen—so you can:
Make confident business decisions
Avoid IRS surprises
Boost your profit margins
Let us handle the numbers so you can focus on building.
Conclusion
WIP isn’t just an accounting term, it’s a critical reflection of how your projects are actually performing. Get it wrong, and your financials can lead you astray. Get it right, and you’ll have clear insight into your cash flow, profitability, and business health.
Tracking Work-in-Progress (WIP) accurately means you're not just reacting to problems but proactively managing your business.
If you're ready to clean up your WIP process and streamline your construction COGS, let Construction Cost Accounting guide the way
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