🏗️ Construction Accounting 101: WIP, Percentage-of-Completion, and ASC 606
The percentage-of-completion (POC) method is the backbone of construction revenue recognition. Instead of recognizing revenue when invoiced, you recognize it as work is performed. This aligns your financial statements with reality — not just cash flow.
Here’s the basic formula:
% Complete = Costs to Date ÷ Total Estimated Costs
Revenue Earned = Total Contract Value × % Complete
This approach provides a far more accurate picture of revenue, expenses, and profit for projects that span months or years. It also satisfies the requirements of ASC 606, the accounting standard governing revenue from contracts with customers.
⚖️ ASC 606: The Standard That Changed Everything
Before ASC 606, construction companies used a patchwork of revenue recognition rules. The 2018 standard brought clarity and consistency — but also complexity. It requires revenue to be recognized based on performance obligations, not just billing milestones.
ASC 606 breaks the process into five steps:
📜 Identify the contract with the customer.
📦 Identify performance obligations (distinct promises of goods or services).
💵 Determine the transaction price.
📊 Allocate the price to performance obligations.
✅ Recognize revenue when (or as) performance obligations are satisfied.
For construction, performance obligations are typically satisfied over time, which means percentage-of-completion is often the right method. But it must be supported by accurate cost tracking, project estimates, and contract documentation.
✅ Pro Tip: Change orders, retainage, and variable consideration must also be factored into ASC 606 calculations — a common source of errors if not carefully tracked.
📉 Overbilling vs. Underbilling: What It Really Means
One of the most misunderstood parts of construction accounting is the relationship between billings and earned revenue. WIP reports make these differences visible, and they’re critical to interpreting your true financial position.
Overbilling happens when you bill more than the revenue you’ve earned. It boosts short-term cash flow but can signal future liability — you still owe work for the cash you’ve received.
Underbilling means you’ve earned more than you’ve billed. It shows work performed but not yet invoiced, which could squeeze your cash flow.
Neither is inherently “bad,” but persistent over- or underbilling can indicate pricing issues, project delays, or misaligned billing schedules.
✅ Action Tip: Monitor over/underbilling monthly. Large fluctuations can distort revenue and create cash flow surprises.
🧾 Journal Entries: How WIP and POC Look in Practice
Here’s a simplified example of how journal entries work under the percentage-of-completion method:
Record construction costs:
Dr Construction in Progress (CIP) — $2,000,000 (Balance Sheet)
Cr Cash / Accounts Payable — $2,000,000 (Balance Sheet)
Record progress billings:
Dr Accounts Receivable — $1,800,000 (Balance Sheet)
Cr Billings on Construction in Progress — $1,800,000 (Balance Sheet)
Recognize revenue and gross profit:
Dr Construction Expenses — $2,000,000 (P&L)
Dr Construction in Progress (Gross Profit) — $500,000 (Balance Sheet)
Cr Construction Revenue — $2,500,000 (P&L)
Record cash collections:
Dr Cash — $1,500,000 (Balance Sheet)
Cr Accounts Receivable — $1,500,000 (Balance Sheet)
This approach ensures your financial statements reflect not just what was billed or collected, but the actual progress and performance of your projects.
🛠️ Best Practices for Construction Accounting Success
Mastering WIP and percentage-of-completion is about more than formulas — it’s about building disciplined processes around them. Here’s how the best-run construction companies do it:
✅ 1. Update project cost estimates regularly.
Accurate revenue recognition depends on accurate cost forecasts. Review and revise estimates as project conditions change.
✅ 2. Build WIP reporting into your monthly close.
Don’t wait until year-end. Monthly WIP reports allow you to catch problems early and adjust billing or project schedules in real time.
✅ 3. Integrate field and accounting data.
Your accounting system is only as good as the data it receives. Sync field reporting, project management tools, and accounting software to ensure costs and progress are aligned.
✅ 4. Train project managers to understand financial impacts.
They don’t need to be accountants, but they do need to understand how decisions affect revenue recognition, billing, and cash flow.
✅ 5. Partner with a controller who knows construction.
This is not an area for trial and error. A seasoned controller ensures compliance with ASC 606, maintains accurate WIP reporting, and keeps leadership informed with reliable data.
✨ Final Thoughts
Construction projects are complex — and so is their accounting. But when done right, WIP reporting and percentage-of-completion transform financial chaos into clarity. They give you visibility into profit margins, project performance, and future cash needs long before the job is complete.
If your books never seem to align with your projects — or if revenue swings wildly from month to month — that’s a sign your accounting structure may need to evolve. Often, the difference between confusion and clarity isn’t more work — it’s better reporting and the right expertise guiding the process.
📩 Acrux Advisory helps construction companies bring order to complexity — from monthly WIP schedules and ASC 606 compliance to revenue recognition and financial reporting. With the right structure in place, your numbers stop being a puzzle and start becoming a powerful tool for growth.
📌 Services & Disclaimer
Acrux Advisory is not a CPA firm and does not provide services requiring a public accountancy license. All services are focused on accounting operations, financial reporting, and controller-level support. We do not provide audit, attest, or tax services that require licensure. Availability may vary, and engagements are accepted based on current capacity.