Construction WIP Accounting: Progress Billing, Over- and Under-Billings Explained

Construction WIP (Work in Progress) accounting is a method of tracking revenue and costs on long-term contracts where work spans multiple accounting periods. Rather than waiting until a project is complete to recognize revenue, WIP accounting uses the percentage-of-completion method to recognize revenue proportionally as work is performed — keeping your financials aligned with actual project progress, not just your billing schedule.

Key Takeaways

• WIP accounting uses the cost-to-cost method: costs incurred to date ÷ total estimated costs = percent complete.
• Earned revenue = contract value × percent complete. The gap between earned revenue and billed-to-date is your over- or under-billing.
• Under-billings (costs and estimated earnings in excess of billings) are assets. Over-billings (billings in excess of costs) are liabilities.
• The percentage-of-completion method is required under GAAP and ASC 606 for most construction contracts; the completed-contract method is allowed only for smaller contractors on short-duration jobs.
• A clean WIP schedule is the first document surety underwriters request — it directly affects your bonding capacity.

What Is WIP Accounting in Construction?

Work-in-progress accounting is a method of tracking revenue and costs on long-term contracts where the work spans multiple accounting periods. In construction, that describes most projects — a commercial buildout doesn't start and finish in the same month, so you need a system to recognize revenue proportionally as you complete the work.

Cash-basis accounting recognizes revenue when you receive payment. If you bill in March but the GC pays in May, your March P&L shows zero revenue despite having a crew on-site burning through labor and materials. Standard accrual recognizes revenue when you bill — better, but still wrong. If you front-loaded the billing schedule to improve cash flow, your books show revenue you haven't yet earned, and a liability hides inside the overbilling.

The percentage-of-completion (POC) method solves both problems. It ties revenue recognition to work actually performed, not to cash received or invoices sent. As Assurance Dimensions notes, "Work in process and completed contract reporting are the highest-risk areas of the construction industry. Virtually all aspects of financial statements and reporting evolve around this financial process."

How Is Construction WIP Calculated?

The standard approach is the cost-to-cost method, which is the basis for most WIP schedules under ASC 606:

Percent Complete = Costs Incurred to Date ÷ Total Estimated Costs

Earned Revenue = Contract Value × Percent Complete

Over/Under Billing = Earned Revenue − Billed to Date

Worked Example (Hypothetical)

Premiercs.com provides a clear illustration using the following hypothetical figures:

In this hypothetical example, the contractor has earned $1,000,000 based on work completed but has only billed $900,000. The project is underbilled by $100,000 — meaning $100,000 worth of work has been performed but not yet invoiced. That amount sits as an asset on the balance sheet, but it represents cash the company has not yet collected.

The Critical Distinction: Budget Spent ≠ Percent Complete

This is the most common WIP mistake. Budget spent tells you how much money has gone out the door. Percent complete tells you how much work has been performed relative to the total estimate. As ieci.org explains: "You may assume that a project is 60% complete simply by comparing the costs to date with your estimated budget. But the percentage spent doesn't mean the percentage complete. While you may have spent 60% of your budget, the work could be only 40% finished."

Using budget spent as a proxy for progress produces a WIP schedule that overstates earned revenue — and hides cost overruns until it's too late to act.

What Are Over-Billings and Under-Billings?

Over-billings and under-billings are the two sides of the gap between what you've earned and what you've invoiced. Both appear on the balance sheet, not the income statement — and understanding which direction you're running on each job is essential for accurate financial reporting.

Over-billing (Billings in Excess of Costs) occurs when the total amount billed to the client exceeds the value of work completed. As SINC explains, if a contractor has completed 20% of the workload and has already billed 50% of the job, they are overbilled by 30%. Over-billings are recorded as liabilities on the balance sheet — the owner has a claim on work not yet performed.

Under-billing (Costs and Estimated Earnings in Excess of Billings) occurs when earned revenue exceeds the amount billed. Under-billings are recorded as assets — the contractor has performed work it hasn't yet invoiced. While this sounds positive, persistent under-billing strains cash flow because the company is funding work out of pocket.

Balance Sheet Treatment

Real-World Example from a WIP Report

Procore's WIP guide illustrates both conditions side by side:

• Job A (hypothetical): Revised budget $100, contract $150, 80% complete, earned revenue $120, billed to date $75 — underbilled by $45. A pending change order is stalling further billing, straining liquidity.
• Job B (hypothetical): Same budget and contract, also 80% complete, earned revenue $120, billed to date $125 — overbilled by $5. The project is on hold; billing status remains as-is.

Billings and earned revenue rarely match exactly on any active job. The question is which direction the gap is running — and whether it's widening.

What Are the Key Components of a WIP Report?

A WIP report is a job-by-job financial snapshot that answers four core questions for every active project: How much have we spent? How much have we billed? How much of the work is actually complete? Are we ahead of or behind our budget and billings?

The seven core components of a standard WIP schedule are:

1. Contract Value — The total agreed price for the project, including approved change orders.
2. Estimated Total Cost — Your current best estimate of total costs to complete the job.
3. Costs Incurred to Date — All costs posted to the job through the reporting date.
4. Percent Complete — Costs to date ÷ estimated total costs (cost-to-cost method).
5. Earned Revenue — Contract value × percent complete.
6. Billed to Date — Total invoices issued to the owner through the reporting date.
7. Over/Under Billing — Earned revenue minus billed to date.

Two alternative progress measures exist alongside cost-to-cost: the units-of-delivery method (useful for repetitive work like housing developments) and the efforts-expended method (uses labor hours as the progress measure). Both are acceptable under ASC 606, but cost-to-cost is the standard for most general contractors on complex, multi-trade projects.

Committed Costs Matter Too

A WIP report that only captures paid costs is incomplete. Committed costs — wages for labor performed but not yet paid, materials on purchase orders, subcontract commitments — must be tracked accurately to ensure the percent-complete calculation reflects real project status. Missing committed costs understates total estimated costs and overstates your margin.

How Does the WIP Schedule Tie to the Income Statement?

The WIP schedule is the bridge between project-level job costing and your company-wide financial statements. Here's how the connection works:

Earned revenue from the WIP schedule flows to the income statement as recognized revenue for the period — not the amount billed, and not the amount collected. If your WIP schedule shows $1,000,000 in earned revenue across all active jobs, that is the revenue your income statement should reflect, regardless of what invoices went out.

The over/under billing balance flows to the balance sheet:

• Under-billings (earned > billed) appear as a current asset.
• Over-billings (billed > earned) appear as a current liability.

As the WIP schedule is updated each month, the change in over/under billing positions flows through to adjust recognized revenue. A job that was overbilled last month and is now further along will see its liability reduce — and that reduction increases recognized revenue in the current period.

This is why WIP reporting is critical for revenue recognition accuracy under ASC 606: revenue recognition aligns with actual project progress rather than billing or cash collection timing.

For a practical look at how the monthly close works across all balance sheet accounts — including WIP positions — see our balance sheet reconciliation checklist.

The Income Statement Impact of WIP Gain and Fade

WIP gain and fade describe how a project's estimated profit margin changes over time — and both flow directly to the income statement.

RedHammer explains the two conditions:

• WIP gain occurs when a project's estimated profit margin increases over time due to cost savings, increased efficiency, or favorable scope changes. For example (hypothetical): a project with an initial estimated profit margin of 10% improves to 12% through efficient methods and better material prices — a 2-percentage-point WIP gain.
• WIP fade occurs when the estimated profit margin decreases due to unforeseen costs, delays, or adverse scope changes. For example (hypothetical): a project with an initial margin of 15% drops to 12% due to regulatory changes and material shortages — a 3-percentage-point WIP fade.

Both show up in the income statement as the WIP schedule is revised each month. Fade that goes undetected until project closeout produces a sudden, large hit to income — the kind of surprise that a monthly WIP review is designed to prevent.

Percentage-of-Completion vs. Completed-Contract Method

Most construction contractors are required to use the percentage-of-completion (POC) method. The completed-contract method (CCM) is available only in specific circumstances.

Source: Steph's Books WIP accounting guide

Per IRC Section 460(e), the IRS allows the completed-contract method only for contracts that will be completed within two years and for contractors with average annual gross receipts of $29 million or less. Even contractors who qualify should note that most bonding companies discourage CCM because it obscures job-level profitability during the contract period.

Why Bonding Companies and Banks Care About Your WIP Schedule

Your WIP schedule is not just an internal accounting tool — it's the primary document external stakeholders use to evaluate your financial health.

As Assurance Dimensions notes: "WIP and backlog reporting are critical in this industry and are essential to meet bonding requirements." Surety underwriters don't trust your billing schedule — they trust your WIP schedule. It tells them whether your company is actually profitable or just generating cash flow through aggressive billing.

The stakes are concrete. As Steph's Books illustrates, a contractor with $620,000 in unrecognized overbillings can see bonding capacity cut by 30%, costing them bids they were otherwise qualified to win. A clean, accurate WIP schedule is the difference between getting bonded at a higher capacity and being constrained to smaller work.

Banks reviewing your line of credit and investors evaluating your business rely on the same document. Inaccurate WIP — whether from human error, missing committed costs, or using budget-spent as a proxy for percent complete — creates real financial exposure that compounds across every job on the schedule.

For a broader look at how construction accounting fits into your monthly close and reporting, see our guide to outsourced accounting for construction firms. If you want to understand what a well-structured monthly close looks like in practice, our month-end close service page walks through the cadence and deliverables. And if you're evaluating whether outsourced accounting is the right fit for your firm, the fit assessment is a good starting point.

Frequently Asked Questions

What is WIP in accounting?

WIP (Work in Progress) in construction accounting refers to the value of incomplete projects at a given point in time. It represents costs incurred on ongoing projects and is used to recognize revenue proportionally as work is performed, ensuring financial statements reflect actual project progress rather than billing or cash timing.

What is the difference between over-billing and under-billing in construction?

Over-billing occurs when the amount invoiced to a client exceeds the value of work completed — recorded as a liability. Under-billing occurs when earned revenue exceeds the amount billed — recorded as an asset. Both are calculated by comparing earned revenue (contract value × percent complete) to billed-to-date on the WIP schedule.

Who manages WIP reporting and cost-to-complete for contractors?

WIP reporting is typically owned by the controller or CFO, in coordination with project managers who provide updated cost-to-complete estimates each month. Accurate WIP requires input from both finance (costs posted, billings issued) and operations (revised budget estimates, committed costs, and change order status).

Can I use budget spent as my percent complete in a WIP report?

No. Budget spent and percent complete are two different things. A job can be 60% through its budget and only 40% complete if costs have run over. Using budget spent as a proxy for progress overstates earned revenue and hides cost overruns until it's too late to act. Use the cost-to-cost method: costs incurred ÷ total estimated costs.

Disclaimer: Laya provides this content for informational purposes only. This material does not constitute tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors before engaging in any transaction.

If your WIP schedule isn't closing on a predictable cadence or your over/under billing positions aren't reconciling to the balance sheet each month, book an intro with Laya to see how we structure the monthly close for construction firms.