The Construction WIP Schedule: Percentage-of-Completion Accounting Under ASC 606

Picture two contractors with identical bank statements on December 31. One walks into his banker's office in January with a bonding capacity bump and a new credit line. The other gets his bond program shrunk and a covenant warning letter. The cash balances were the same. The retained earnings were close. So what was different?

The work-in-progress schedule.

In construction, the bank statement lies. Cash in the bank at month-end could be money you collected for work you haven't done yet — a hidden liability — or it could mask millions of dollars in revenue you've earned but haven't billed for. The WIP schedule is the report that tells the truth. It's also the single most important document a contractor produces for their surety, their lender, and themselves.

If you run a construction business, an engineering firm, a specialty trade contractor, or any business with long-duration projects billed in stages, this guide will walk you through what the WIP schedule is, how percentage-of-completion accounting works under ASC 606, how to read and produce a WIP report, and the financial signals it sends to anyone who funds your business.

Why Cash Accounting Doesn't Work for Construction

Most small businesses can get by with cash-basis or simple accrual accounting. A roofer finishes a job, sends an invoice, gets paid. Easy.

But construction projects don't behave like that. A general contractor signs a $4 million contract in March, pours the slab in May, frames in July, finishes drywall in October, hands over keys in February. Along the way, the owner sends progress payments — maybe $300,000 in May, $800,000 in August, $500,000 in November. The contractor pays subs and material suppliers throughout, sometimes ahead of and sometimes behind the billings.

If you simply matched cash in and cash out, you'd see wild swings in profitability that have nothing to do with the actual progress of the work. One month would look like a windfall (big draw, low costs paid yet); the next like a disaster (no draws, big sub payments due). The financial statements would tell you nothing about how the project is actually performing.

Percentage-of-completion accounting solves this by recognizing revenue and gross profit in proportion to the work completed, not in proportion to when checks change hands. The WIP schedule is where that calculation lives, project by project.

The Five-Step ASC 606 Framework, Construction-Style

The current revenue recognition standard — ASC 606 in the U.S. and IFRS 15 internationally — requires every revenue arrangement to follow a five-step model. For construction contracts, the steps usually map cleanly onto how a job already works.

Identify the contract. A signed contract with enforceable rights and obligations, defined payment terms, and probable collectability. Letters of intent and verbal change orders create headaches here.
Identify the performance obligations. Most fixed-price construction contracts contain a single performance obligation — a building, a road, a tenant fit-out — even if it includes many activities, because the activities are highly interrelated and not distinct from the customer's perspective.
Determine the transaction price. The contract price plus any approved change orders, less liquidated damages, plus or minus variable consideration like incentive fees, retainage, or claims you have a reasonable expectation of recovering.
Allocate the transaction price. If the contract really does have multiple distinct performance obligations (rare in vertical construction, more common in design-build with separate maintenance contracts), allocate the price based on standalone selling prices.
Recognize revenue when (or as) performance obligations are satisfied. For most construction contracts, control transfers to the customer continuously over time, so revenue is recognized over time using a measure of progress.

That last step is where percentage-of-completion lives.

Input Methods vs. Output Methods

ASC 606 lets you measure progress two ways:

Input methods look at what you've put into the project — costs incurred, labor hours, equipment hours, materials installed — relative to the total expected inputs. The cost-to-cost method, which is by far the most common in construction, divides costs incurred to date by total estimated cost at completion.
Output methods look at what's been delivered — units produced, milestones hit, square feet completed, surveyor's estimates — relative to total deliverables.

Cost-to-cost wins in most construction shops because contractors already track job costs in detail, and a credible total estimated cost at completion is built into the original bid. The catch is that uninstalled materials sitting in your yard inflate the percentage if you include them, so ASC 606 generally requires you to exclude or adjust for inefficient inputs (like rework) and for materials that haven't been transferred to the customer yet.

The Cost-to-Cost Calculation

Here's the engine that drives the WIP schedule:

Percent Complete = Costs Incurred to Date ÷ Total Estimated Cost at Completion
Earned Revenue   = Percent Complete × Current Contract Value
Earned Gross     = Earned Revenue – Costs Incurred to Date
Profit

Then, to compare what you've earned against what you've billed:

Over- / (Under-) = Billings to Date – Earned Revenue
Billing

A positive number means you've billed more than you've earned (overbilling — a liability). A negative number means you've earned more than you've billed (underbilling — an asset).

A Simple Worked Example

Imagine a $4,000,000 fixed-price contract with an original estimated total cost of $3,200,000 (a 20% gross margin). At month-end:

Costs incurred to date: $1,600,000
Revised total estimated cost: $3,300,000 (a small overrun showed up)
Billings to date: $2,100,000
Cash collected: $1,800,000 (the rest is in retainage and AR)

Run the numbers:

Percent complete = 1,600,000 ÷ 3,300,000 = 48.5%
Earned revenue = 48.5% × 4,000,000 = $1,940,000
Earned gross profit = 1,940,000 – 1,600,000 = $340,000
Over/(under) billing = 2,100,000 – 1,940,000 = $160,000 overbilled

Two stories pop out. First, the project margin has slipped from the bid: original gross was 20% ($800,000 / $4,000,000), but the new estimated total cost of $3,300,000 implies $700,000 / $4,000,000 = 17.5%. The job is still profitable, but you've burned through 12.5% of the projected margin. Second, $160,000 is sitting on the balance sheet as a liability — you owe the customer that much in performance, even though the cash already showed up.

If you don't book the $160,000 as "billings in excess of costs and estimated earnings on uncompleted contracts" (a current liability), your balance sheet looks artificially strong and your income statement shows revenue you haven't actually earned.

Reading a WIP Schedule

A complete WIP report has at minimum seven columns per project. Anything less and you're missing information sureties and lenders will ask for.

Column	What it represents
Contract Value	Original contract plus approved change orders. Pending change orders sit elsewhere.
Estimated Cost at Completion	Original estimated cost plus any revisions identified through the project.
Estimated Gross Profit	Contract value minus estimated cost.
Costs to Date	Actual costs incurred against the job through the reporting date.
Percent Complete	Costs to date ÷ estimated cost. Sanity-check against superintendent's field judgment.
Earned Revenue	Percent complete × contract value.
Billings to Date	Total invoiced, including approved change order billings.
Over/(Under) Billing	Billings minus earned revenue.

A schedule for a contractor with ten active jobs will have ten rows. Totals roll up to two journal entry adjustments at month-end: one for "costs and estimated earnings in excess of billings" (an asset) and one for "billings in excess of costs and estimated earnings" (a liability). Together those two figures, sometimes called the "WIP adjustments," reconcile your accrual books to the project-level reality.

Overbillings and Underbillings: What They Actually Mean

A novice looks at a column of overbillings and thinks "great, we collected ahead of schedule." A seasoned construction CFO looks at the same column and starts asking hard questions.

Overbillings: A Borrowed Cash Liability

If you've billed $1,160,000 on a job where you've earned $1,000,000, you collected $160,000 from the customer for work you haven't done yet. You're effectively borrowing from your customer. That money has to go back into the project as the work catches up — pay subs, buy material, run crews — but in the meantime it's hiding in your operating account.

A modest level of overbilling is normal and even prudent. Front-loaded schedules of values are common in construction; you mobilize, set up the site, and have legitimate early costs that owners agree to pay early. The problem starts when overbillings become a financing strategy. A contractor who chronically overbills uses customer cash to pay for last quarter's losses, and when a downturn hits and new work dries up, the overbillings collapse and the balance sheet evaporates.

Sureties watch this number obsessively. So do banks with covenants tied to working capital or debt-to-equity ratios.

Underbillings: Earned Revenue Trapped in WIP

The flip side is just as serious. If you've earned $1,000,000 but only billed $850,000, the $150,000 difference sits on your balance sheet as an asset — but it's an asset you haven't collected and may have a hard time collecting. Underbillings can come from legitimate sources:

Pending change orders that the project manager is confident will be approved but haven't been signed yet.
Approved change orders that haven't yet hit the next pay application.
Projects with milestone-based billing where work is ahead of the next milestone.
Quantities installed that exceed what the schedule of values allows for at this stage.

But underbillings can also come from problem sources:

Disputed change orders the owner is fighting.
Weak project administration — the PM didn't get a billing in on time.
Cost overruns being absorbed without corresponding price relief.

Sureties especially distrust underbillings driven by disputes, because they may never convert to cash.

Estimated Cost at Completion: The Number That Hides Trouble

The percent-complete calculation is sensitive to one number above all others: the estimated cost at completion (often abbreviated ETC or EAC). Get it wrong and the entire WIP schedule lies.

Here's why. If a project is truly going to cost $3,500,000 but the project manager keeps the estimate at $3,200,000 because he's optimistic about pulling it back, then with $1,600,000 of costs to date the percent complete shows 50% instead of the truthful 45.7%. The earned revenue is overstated, the gross profit is overstated, and a problem job parades through the financials as a healthy one — until reality catches up in a single bad month and gross profit collapses. This is the classic "profit fade" pattern that surety underwriters look for.

A disciplined estimating process updates the ETC monthly, with input from project managers, superintendents, and the estimator who originally bid the job. The construction CFO's job is to challenge optimistic numbers and ensure that expected losses are recognized immediately. Under ASC 606, if a contract is expected to result in a loss, the entire estimated loss must be recognized in the period it becomes probable — not spread over the remaining work. A loss provision will hit your earnings hard but it's the right answer, and any auditor or surety will demand it.

What Sureties and Banks Actually Look For

When a surety underwriter or a construction lender opens your WIP schedule, here's what runs through their head:

Backlog quality. Total contract value of all active jobs minus earned revenue to date — that's your backlog. Is it growing? Is the gross margin in backlog higher or lower than what's been completed? A shrinking backlog with eroding margins signals trouble ahead.

Profit fade. Are estimated gross profits at the start of jobs higher than what gets reported as completed? A pattern of jobs starting at 18% margin and finishing at 10% suggests either chronically underestimated costs or aggressive billing practices.

Overbilling concentration. Is most of your equity tied up in overbillings on a few large jobs? If those jobs hit trouble, the cash isn't there to make up for the financing you've been doing.

Underbilling concentration. Are large underbillings sitting on aged jobs, possibly tied to disputed change orders? Those underbillings may be uncollectible.

Job size relative to capacity. Sureties care about the largest job in your WIP relative to your backlog and your working capital. A $20 million job for a contractor with $30 million of backlog and $1.5 million of working capital is a concentration risk.

Comparison to prior periods. A WIP that bounces around quarter to quarter with major restatements signals weak controls. Sureties want to see consistency and discipline.

Bank covenants compound these concerns. Many construction loan agreements set minimum working capital, fixed-charge coverage, and debt-to-equity ratios that are calculated using GAAP financials — meaning the WIP adjustments directly drive whether you trip a covenant. Overstated overbillings can flatter your covenants temporarily but expose you to a disaster when the truth comes out.

Bookkeeping Mechanics: The Journal Entries Behind the WIP

For each reporting period, after the WIP schedule is built, the construction accountant typically books two summary entries.

To recognize earned revenue and cost of revenue:

Dr. Cost of construction revenue   1,600,000
    Cr. Construction costs (job WIP)              1,600,000
Dr. Contract receivables (or AR)   1,940,000
    Cr. Construction revenue                       1,940,000

(In practice many contractors keep all costs flowing through job-cost ledgers to a "construction in progress" asset throughout the month and reclass to cost of revenue once the WIP runs.)

To record the over/under billing adjustment:

Dr. Contract receivables                    160,000
    Cr. Billings in excess of costs and earned earnings  160,000

(This single adjusting entry across all jobs, net, lands the WIP-implied liability or asset on the balance sheet.)

The mechanics aren't hard once you've done them a couple of times, but the underlying job-cost data has to be airtight. If you can't trust the costs-to-date figure for each project, the entire WIP is fiction.

Job Costing: The Foundation Underneath WIP

A WIP schedule is only as accurate as the underlying job-cost system. Every dollar of labor, material, equipment, subcontractor, and indirect cost has to be assigned to the right job and the right cost code (often broken down by CSI division or by phase). Common pitfalls:

Slow timesheet processing. If field labor isn't coded to projects within a few days, your costs-to-date are stale and your WIP is wrong.
Late vendor invoices. A subcontractor who bills 45 days behind means costs are missing from current-period WIP. The fix is accruing for known but unbilled work at month-end.
Misallocated indirect costs. Equipment, supervision, and warranty reserves need a defensible allocation method or your job margins are distorted.
Inventory and uninstalled materials. Under ASC 606, materials sitting at the warehouse generally shouldn't drive percent-complete higher because they haven't been transferred to the customer.
Self-performed vs. subcontracted work. Contractors who self-perform and subcontract on the same project need to be careful that the cost mix doesn't distort the cost-to-cost calculation.

Solid job costing requires real-time discipline: daily time entry, weekly accruals, monthly cost-to-complete reviews. Plain-text accounting and version-controlled ledgers make this kind of granular cost tracking auditable, since every cost movement leaves a trail you can review and reconcile.

Change Orders, Claims, and Variable Consideration

Change orders are where construction WIP gets messy. A few rules of thumb under ASC 606:

Approved change orders with a fixed price get folded into the contract value and the cost estimate immediately. They flow through the percent-complete calculation just like the original scope.
Unpriced change orders (the work is approved, the price isn't yet) require an estimate of the variable consideration. You can include the estimated price only to the extent it's probable that a significant reversal won't happen later.
Unapproved change orders and claims (you're seeking compensation but the owner hasn't agreed) require the highest bar. Generally, you don't recognize revenue on these until recovery is probable and reasonably estimable. Some contractors recognize the related costs but defer the revenue, which produces an underbilling.
Pending claims and disputes get a careful disclosure but rarely revenue recognition.

The temptation to include too much pending change-order value in WIP is enormous, especially when projects are running over and the PM needs the numbers to look good. A disciplined accounting process pushes back here, because every dollar of unsupported revenue today becomes a profit fade tomorrow.

Internal Controls and Monthly Discipline

A useful WIP isn't an annual exercise. The best construction companies build a monthly close cycle around it:

Days 1–3 of the month: Field reports closed for the prior month. Subcontractor billings in. Material receipts reconciled.
Days 4–6: Project managers update cost-to-complete estimates for every active job. CFO or controller reviews any job with margin movement greater than a defined threshold.
Days 7–8: WIP schedule produced and reviewed. Loss provisions identified. Over/under billing adjustments calculated.
Days 9–10: Books closed. Financial statements produced. WIP and key metrics distributed to ownership and bonding agent.

Faster closes are achievable — many strong contractors close in five business days — but the WIP review can't be rushed without quality loss. Cutting corners here is exactly how the profit fade pattern emerges in the next quarter's financials.

Common WIP Mistakes That Cost Contractors Money

A short list of patterns that get contractors into trouble:

Treating the WIP as a tax exercise. Some contractors only update WIP at year-end for the audit and tax return. By then, the year's financial decisions have already been made on bad data.
Ignoring loss provisions. Postponing loss recognition because "we'll make it up on change orders" is a violation of GAAP and a red flag for any auditor or surety.
Inflating contract value with verbal change orders. If it's not signed, it's not in.
Padding cost-to-complete after a problem. Burying overruns in the next period's "increased estimate" smooths reported margin but breaks the audit trail.
Letting overbillings drift up over time. A contractor whose total overbillings keep growing as a percentage of revenue is consuming customer cash to fund operations — a slow-motion solvency problem.
Forgetting retainage. Retention is contract revenue earned, but not yet billable until project completion. It belongs in your WIP and your AR aging — but tracked separately because of the longer collection cycle.

A Note on Tax vs. Financial Reporting

In the U.S., contractors that meet the small-contractor exception (currently under $30 million of average annual gross receipts, indexed for inflation) can use the completed-contract method for tax purposes on long-term contracts, deferring revenue and tax until project completion. Larger contractors are generally required to use the percentage-of-completion method for tax under IRC §460, with cost-to-cost as the standard measurement.

But your tax method and your GAAP financial reporting method don't have to match. Most contractors maintain books on the percentage-of-completion method for GAAP and lender purposes, and run a separate tax computation based on what the IRS allows. The WIP schedule supports both calculations, since it captures the full set of underlying numbers.

Keep Your Construction Books Audit-Ready from Day One

The WIP schedule is only as good as the underlying transactions, cost codes, and supporting evidence behind it. When your bonding agent calls or your auditor sits down across the table, you need to be able to point at every dollar and explain where it came from.

Beancount.io provides plain-text accounting that's transparent, version-controlled, and auditable down to the transaction. Every cost code, every job allocation, every WIP adjustment is human-readable, queryable, and stored in a system that doesn't lock you in. For construction businesses where every project's accounting trail matters to your surety, your lender, and your tax position, that kind of traceability is a competitive advantage. Get started for free and build the kind of audit-ready ledger that bonding companies actually want to see.

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