In construction accounting, the Work-in-Progress (WIP) report is one of the most critical tools for financial control and project management. It provides a snapshot of where each project stands financially, helping stakeholders understand whether jobs are on track, overbilled, underbilled, or at risk of cost overruns. If you’re new to construction accounting, mastering WIP report preparation is essential for accurate financial reporting and informed decision-making.
What Is a WIP Report?
A WIP report tracks the financial progress of active construction projects. It compares contract value, costs incurred, billings, and estimated completion to determine:
- Percentage of completion
- Revenue earned to date
- Overbillings or underbillings
- Projected profit or loss
This report is typically prepared monthly and is a key component of both internal management reporting and external financial statements.
Why Is the WIP Report Important?
The WIP report serves multiple purposes:
- Revenue Recognition: Ensures compliance with percentage-of-completion accounting under GAAP.
- Cash Flow Management: Identifies overbilled projects (good for cash) and underbilled projects (potential cash shortfall).
- Risk Management: Highlights jobs trending toward cost overruns.
- Decision Support: Provides data for forecasting and resource allocation.
Without an accurate WIP report, companies risk misstating revenue, mismanaging cash flow, and overlooking problem jobs until it’s too late.
Key Components of a WIP Report
A standard WIP schedule includes the following columns:
- Job Name/Number – Identifies the project.
- Original Contract Amount – The initial agreed-upon contract value.
- Approved Change Orders – Adjustments to the contract amount.
- Revised Contract Amount – Original contract plus approved change orders.
- Costs to Date – All costs incurred on the project so far.
- Estimated Cost to Complete – Forecasted remaining costs.
- Estimated Total Cost – Costs to date plus estimated cost to complete.
- Estimated Gross Profit – Revised contract amount minus estimated total cost.
- Percent Complete – Costs to date ÷ Estimated total cost.
- Revenue Earned to Date – Percent complete × Revised contract amount.
- Billings to Date – Total invoiced to the client.
- Overbilling/Underbilling – Revenue earned minus billings to date.
Step-by-Step Guide to Preparing a WIP Report
Step 1: Gather Project Data
Start by collecting the following for each active job:
- Original contract amount
- Approved change orders
- Total costs incurred to date
- Current billings
- Project manager’s estimate of remaining costs
Accurate data is the foundation of a reliable WIP report. Strong internal controls, including purchase orders, support this accuracy.
Step 2: Calculate Revised Contract Amount
Add the original contract amount and any approved change orders:
Revised Contract Amount = Original Contract + Approved Change Orders
Step 3: Estimate Total Cost
Combine costs incurred to date with the estimated cost to complete:
Estimated Total Cost = Costs to Date + Estimated Cost to Complete
Step 4: Determine Percent Complete
Divide costs to date by the estimated total cost:
Percent Complete = Costs to Date ÷ Estimated Total Cost
This percentage reflects the physical and financial progress of the job.
Step 5: Compute Revenue Earned
Multiply the percent complete by the revised contract amount:
Revenue Earned = Percent Complete × Revised Contract Amount
This is the amount of revenue that should be recognized under the percentage-of-completion method.
Step 6: Compare Revenue Earned to Billings
Subtract billings to date from revenue earned:
Overbilling/Underbilling = Revenue Earned – Billings to Date
- Positive result: Underbilled (you’ve earned more than you’ve billed).
- Negative result: Overbilled (you’ve billed more than you’ve earned).
Step 7: Calculate Estimated Gross Profit
Subtract the estimated total cost from the revised contract amount:
Estimated Gross Profit = Revised Contract Amount – Estimated Total Cost
This figure helps assess whether the job is still on track to meet its original profit goals.
Common Pitfalls in WIP Reporting
Inaccurate Cost-to-Complete EstimatesIf project managers underestimate remaining costs, the WIP report will overstate profit.
Delayed Change Order ApprovalsFailing to include approved change orders skews contract values and revenue recognition.
Timing Differences in BillingsLarge invoices near month-end can distort over/underbilling calculations if not matched with progress.
Not Updating Forecasts RegularlyWIP reports should reflect the most current information, not outdated estimates.
Best Practices for Reliable WIP Reports
- Collaborate with Project Managers: They provide the most accurate cost-to-complete estimates. Leadership in the accounting function matters.
- Standardize the Process: Use consistent templates and definitions across all projects.
- Leverage Software: Construction accounting systems like Sage 300 CRE, Viewpoint, or Foundation can automate calculations and reduce errors.
- Review Monthly: Regular updates ensure timely detection of problem jobs.
- Tie to Financial Statements: Ensure WIP adjustments flow into the general ledger for accurate reporting.
Why WIP Reports Drive Success
A well-prepared WIP report is more than a compliance tool—it’s a management dashboard. It helps identify:
- Jobs that are cash-positive (overbilled)
- Jobs that may require additional billing (underbilled)
- Projects trending toward cost overruns
- Overall company profitability in real time
By using WIP reports effectively, construction companies can improve cash flow, reduce risk, and make proactive decisions that protect margins.
Final Thoughts
Preparing a WIP report may seem complex at first, but once you understand the components and calculations, it becomes an indispensable tool for financial control and project success. Accurate WIP reporting ensures that revenue is recognized properly, cash flow is managed effectively, and potential issues are addressed before they escalate.