How to handle work in progress accounting for general contractors?
Work in progress accounting exists because construction jobs don’t fit neatly into monthly or yearly accounting periods. A six-month project that starts in October and finishes in March spans two tax years. Without WIP accounting, your financial statements won’t reflect reality during the project or at year end.
The core idea is matching revenue recognition to actual progress on the job, not just to when you bill or receive payment. Most contractors use the percentage of completion method, which recognizes revenue based on how much of the estimated total cost has been incurred. If you’ve spent 60% of your estimated costs on a job, you recognize 60% of the contract revenue.
This requires two things you need to track accurately. First, you need reliable cost estimates for each job before work starts. Second, you need to track actual costs against those estimates as work progresses. If your estimates are wrong or your cost tracking is sloppy, your WIP calculations will be meaningless.
The WIP schedule compares what you’ve billed to what you’ve earned based on percentage complete. If you’ve billed $80,000 but only earned $60,000 based on progress, you’re overbilled by $20,000. That shows as a liability on your balance sheet because you owe that work to the customer. If you’ve earned $60,000 but only billed $40,000, you’re underbilled by $20,000. That’s an asset because you have revenue coming that you’ve already earned.
Your bonding company cares about this. Banks care about this. Your financial statements are misleading without it. A contractor who bills ahead on several jobs might look profitable when they’re actually losing money once the work catches up.
Proper job costing is the foundation of WIP accounting. Every labor hour, material purchase, subcontractor invoice, and equipment rental needs to be coded to the correct job. You can’t calculate percentage complete if you don’t know your actual costs by project.
Run your WIP schedule monthly at minimum. Compare billed amounts to earned revenue on every active job. Look for jobs where costs are running ahead of estimates because those will show losses when you recalculate the percentage complete. Finding problems early lets you adjust pricing, improve efficiency, or at least stop the bleeding before the job ends.
Many contractors avoid WIP accounting because it feels complicated. The reality is that skipping it means you don’t actually know which jobs are profitable until they’re done. Working with a Findlay bookkeeper who understands construction accounting can help you set up proper tracking and run WIP schedules that give you a real picture of your business.
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