🏗️ Construction Accounting Deep Dive: WIP, Percentage-of-Completion, and ASC 606 Explained
Construction is one of the most financially complex industries in the world. Unlike retail, where a sale is made and revenue is recognized immediately, or SaaS, where monthly subscriptions are predictable, construction projects unfold over months — sometimes years — and often evolve as they progress. This creates unique accounting challenges that require more than basic bookkeeping.
To stay profitable and compliant, construction companies must master three essential concepts:
Work in Progress (WIP), percentage-of-completion accounting, and ASC 606 revenue recognition.
Together, these tools ensure revenue is recognized properly, costs are tracked accurately, and project profitability is visible long before the project is complete.
In this guide, we’ll break down what each of these terms means, how they work, and how to apply them — all without complicated jargon.
🧱 Why Construction Accounting Is Different
Construction accounting goes beyond the basics of debits and credits because projects don’t start and finish in the same accounting period. Here’s what makes it more complex:
📆 Timing: Work starts long before revenue is fully earned or paid.
📊 Measurement: Progress must be measured as work is performed, not just when invoices are sent.
🏗️ Contracts: Every project may have different terms, milestones, and billing structures.
🔄 Changes: Scope changes, cost revisions, and change orders all affect revenue and profitability.
Because of these variables, construction companies can’t rely on simple cash or accrual accounting. They need specialized methods that match revenue and costs to the work completed — and that’s where WIP and percentage-of-completion accounting come in.
📈 Work in Progress (WIP): The Financial Health of Every Project
The Work in Progress (WIP) schedule is the heartbeat of construction accounting. It’s a living report that tracks the financial status of each project as it moves forward. A properly maintained WIP schedule tells you exactly where every project stands and how it’s performing financially.
A typical WIP schedule includes:
Total contract value: The full amount the client has agreed to pay.
Costs incurred to date: All expenses paid or accrued on the project so far.
Estimated total cost: The current best estimate of the total cost to complete the project.
Percentage complete: How far along the project is based on costs incurred versus total estimated cost.
Revenue recognized to date: How much revenue should be reported based on progress.
Billings to date: How much has been invoiced to the client so far.
Overbilling or underbilling: The difference between revenue earned and revenue billed.
With a WIP schedule, owners, CFOs, and project managers can see whether projects are on track, underperforming, or outperforming expectations — and they can course-correct early instead of waiting until the project is over.
📊 Percentage-of-Completion Accounting: Recognizing Revenue Over Time
Most construction companies use the percentage-of-completion (POC) method to recognize revenue. Instead of waiting until a project is finished to record income, revenue and gross profit are recognized as work is completed. This provides a more accurate picture of performance and profitability throughout the life of a project.
Here’s how it works in practice:
Measure Progress: Calculate how far along the project is by comparing costs incurred to date with the total estimated cost.
Recognize Revenue: Multiply that completion percentage by the total contract value to determine how much revenue should be recognized so far.
Match Costs: Record costs incurred during the same period to match revenue with the effort that generated it.
For example, imagine a $4 million construction project expected to cost $3 million in total. If $1.5 million in costs have been incurred so far, the project is 50% complete. That means the company should recognize $2 million in revenue and $1.5 million in costs to date, leaving $500,000 as gross profit.
📌 Why it matters: Percentage-of-completion accounting ensures financial statements reflect reality. It shows project performance as work progresses, helps management forecast profitability, and provides lenders, investors, and clients with accurate financial information.
📘 ASC 606: The Standard Behind Revenue Recognition
The ASC 606 accounting standard governs how companies recognize revenue from contracts — and it applies directly to construction. Its guiding principle is simple: revenue should be recognized when (and as) performance obligations are satisfied.
For construction companies, that usually means revenue must be recognized over time as work is performed, not just when payment is received or the project is complete.
ASC 606 outlines five steps companies must follow:
Identify the contract – There must be a legally enforceable agreement.
Identify performance obligations – Define what’s being delivered (a full building, specific milestones, etc.).
Determine the transaction price – Establish the total revenue expected.
Allocate the price to performance obligations – Split revenue between deliverables if there are multiple.
Recognize revenue as obligations are satisfied – Usually measured by percentage complete.
This standard formalizes the revenue recognition process, ensuring consistency, comparability, and compliance. Most importantly, it builds credibility with banks, investors, and auditors.
📑 Example: Accounting for a Construction Project
Let’s walk through a simplified example step by step.
Scenario:
Contract value: $4,000,000
Estimated total cost: $3,000,000
Costs incurred to date: $1,500,000
Billings to date: $1,800,000
Cash collected: $1,500,000
Step 1 – Record Construction Costs:
When costs are incurred, they’re recorded as Construction in Progress (CIP), an asset on the balance sheet.
Dr Construction in Progress (CIP) 1,500,000
Cr Cash / Accounts Payable 1,500,000
Step 2 – Record Billings:
When invoices are issued, record the receivable and related liability.
Dr Accounts Receivable 1,800,000
Cr Billings on Construction in Progress 1,800,000
Step 3 – Recognize Revenue:
If the project is 50% complete, $2,000,000 of revenue should be recognized.
Dr Construction Expenses 1,500,000
Dr Construction in Progress (GP) 500,000
Cr Construction Revenue 2,000,000
Step 4 – Record Cash Collections:
When payments are received, reduce accounts receivable.
Dr Cash 1,500,000
Cr Accounts Receivable 1,500,000
By following these steps, the financial statements accurately reflect the project’s progress, costs, and profitability.
📉 Overbilling vs. Underbilling: Reading the Signals
Because billing schedules often don’t match project progress exactly, construction accounting must account for overbilling and underbilling:
Overbilling: When the company bills more than the revenue earned to date. This creates a liability because the company has billed ahead of work performed.
Underbilling: When revenue earned exceeds billings. This creates an asset because the company has earned revenue that hasn’t been billed yet.
Neither is inherently good or bad — but both carry strategic implications. Overbilling can boost short-term cash flow but might signal slower future revenue recognition. Underbilling can indicate delayed invoicing or project delays, which could affect cash flow and profitability.
Tracking these amounts monthly is essential to understanding project health and cash position.
🔄 The Importance of Updating Estimates
Construction projects are rarely static. Costs change due to materials, labor, or scope adjustments. Because revenue recognition depends on total estimated costs, regularly updating estimates is essential for accurate reporting.
If estimated costs increase, the completion percentage decreases, and recognized revenue may need to be reduced. If estimated costs decrease, revenue recognition may accelerate. Either way, failing to update estimates leads to misstated financials and potential compliance issues.
📌 Best Practice: Update your cost estimates and WIP schedules every month. This keeps revenue recognition aligned with actual project performance and ensures reports reflect reality.
🚧 Common Construction Accounting Mistakes
Even experienced companies make mistakes when dealing with WIP, percentage-of-completion, and ASC 606. Here are some of the most frequent — and how to avoid them:
❌ Recognizing revenue based on invoices instead of progress.
➤ Always tie revenue recognition to project completion, not billing.❌ Failing to update total estimated costs.
➤ Review and revise cost estimates regularly to ensure accuracy.❌ Not reconciling WIP schedules to the general ledger.
➤ CIP, billings, and revenue accounts should reconcile monthly.❌ Inconsistent documentation of change orders.
➤ All changes must be documented, approved, and reflected in contract values.❌ Mixing project-level and company-level reporting.
➤ Maintain detailed project accounting and roll it up into consolidated reports.
Avoiding these mistakes improves accuracy, speeds up the close, and builds confidence with auditors, lenders, and stakeholders.
🧰 Best Practices for Strong Construction Accounting
To build a reliable and scalable accounting function, focus on these best practices:
📅 Update WIP Schedules Monthly – Keep progress, costs, and billings current for each project.
🧭 Align With ASC 606 – Review contracts and policies to ensure compliance.
🧮 Automate Processes – Use a construction-focused ERP to handle revenue recognition, job costing, and WIP reporting.
📊 Monitor Over/Under Billings – Review them monthly to manage cash flow and detect issues early.
📑 Document Everything – Contracts, change orders, and estimates should all be properly documented and auditable.
🏗️ Train Project Managers – Their input on costs and progress directly affects revenue recognition and financial reporting.
✨ Final Thoughts
Construction accounting is more than compliance — it’s about clarity, control, and confidence. Tools like WIP schedules, percentage-of-completion revenue recognition, and ASC 606 alignment help companies move beyond guesswork to precise, real-time insights into project performance and profitability.
When done right, they not only keep your financial statements accurate but also help you make smarter decisions, manage cash flow better, and build trust with investors, lenders, and clients. And when they’re built into a repeatable process, they transform accounting from a back-office function into a strategic advantage.
📩 Acrux Advisory helps construction companies implement reliable accounting processes, manage WIP reporting, and align revenue recognition with ASC 606 — creating clarity and control over every project.
📌 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.