To calculate work in progress in construction, divide the costs you’ve incurred on a job by the total costs you now expect the job to require, multiply that percentage by the contract price to get earned revenue, and then compare earned revenue to what you’ve actually billed. The gap between the two is your WIP position: underbilled if you’ve earned more than you’ve invoiced, overbilled if you’ve invoiced more than you’ve earned. The math is simple. The judgment behind the inputs is where projects get into trouble.
The Four Numbers You Need Before You Start
Every WIP calculation pulls from four figures in your accounting system. If any one of them is stale, the whole report distorts.
- Total contract price. The full amount the owner owes you, including every approved change order. Pull it from signed contracts and approved modifications, not the original bid.
- Total estimated costs at completion. Your current budget to finish the job, covering labor, materials, equipment, and allocated overhead. This should come from the project manager or estimator based on where the work stands today.
- Actual costs incurred to date. What you’ve already spent on the project, drawn from payroll, accounts payable, and job cost reports.
- Total billings to date. Every invoice sent to the owner so far, from your accounts receivable ledger.
Estimated cost at completion is the most dangerous number on the list because it depends on human judgment. Project managers who haven’t walked a job recently tend to leave the original estimate in place, which quietly inflates or deflates every downstream calculation. Firms that update the estimate monthly catch problems early. Firms that wait until year-end find them during the audit.
Step One: Calculate the Percentage of Completion
Use the cost-to-cost method. Divide actual costs incurred to date by total estimated costs at completion:
Percentage of Completion = Costs Incurred to Date ÷ Total Estimated Costs at Completion
Spent $400,000 on a job you now expect will cost $1,000,000 to finish? Your completion percentage is 0.40, or 40 percent. That decimal becomes the multiplier for the next step.
The precision of this figure lives entirely in the denominator. Underestimate total costs and the percentage looks artificially high, which overstates earned revenue and makes the project look more profitable than it is. Overestimate and the project looks behind schedule.
Step Two: Calculate Earned Revenue
Multiply the percentage of completion by the total contract price:
Earned Revenue = Percentage of Completion × Total Contract Price
On a $2,000,000 contract at 40 percent completion, earned revenue is $800,000. That’s the portion of the contract value you’ve legitimately earned through work performed, regardless of what you’ve billed or collected.
Earned revenue is the anchor of the WIP report. It doesn’t care about your billing schedule or your cash position. It reflects only how much of the promised work you’ve completed, measured through the costs you’ve burned.
Step Three: Compare Earned Revenue to Billings
Subtract total billings from earned revenue:
WIP Position = Earned Revenue − Total Billings to Date
A positive number means underbilling. A negative number means overbilling. Both carry real consequences.
Underbillings
When earned revenue exceeds billings, you’ve done more work than you’ve invoiced for. Earned revenue of $800,000 against $700,000 billed leaves a $100,000 underbilling. On the balance sheet it shows up as a current asset, historically called “Costs and Estimated Earnings in Excess of Billings” and now, under ASC 606, a “contract asset.” It represents money the owner owes you for work already performed.
Underbillings drain cash. You’ve paid for labor and materials but haven’t asked for reimbursement. A contractor with heavy underbillings across several jobs can look profitable on paper while struggling to make payroll. The fix is usually straightforward: bill more aggressively and more often. Most underbilling problems trace back to lagging pay applications, not to contractual restrictions.
Overbillings
When billings exceed earned revenue, you’ve collected more than you’ve earned. Billed $900,000 against $800,000 in earned revenue? The $100,000 difference is an overbilling, and it lands on the balance sheet as a current liability — historically “Billings in Excess of Costs and Estimated Earnings,” now a “contract liability” under ASC 606. You are effectively holding the owner’s money for work you haven’t yet completed.
A moderate overbilled position is normal and often intentional. Front-loading billings through mobilization charges or heavier invoicing on early phases lets you fund project costs with the owner’s cash instead of borrowing. The danger comes when overbilled funds get spent on other projects or general operations. That pattern amounts to borrowing from one client to pay another, and it collapses the moment a project slips or a payment gets held up.
Step Four: Post the Adjustment to Your Books
The calculation only matters if the numbers flow into your general ledger so the financial statements reflect earned work rather than just billing history.
For an underbilled project, the accountant debits a contract asset account (Costs and Estimated Earnings in Excess of Billings) and credits a revenue account. That increases recognized income on the income statement to match the value of work performed, even though the invoice hasn’t gone out.
For an overbilled project, the entry flips. Debit revenue and credit a contract liability account (Billings in Excess of Costs and Estimated Earnings). This keeps you from reporting income you haven’t earned, which would inflate profits and tax liability.
Most contractors post these entries monthly or quarterly. Consistency matters more than frequency. Posting only at year-end may satisfy your CPA, but it leaves you flying blind for eleven months.
Adjustments That Change the Math
A few situations require you to modify the inputs before the standard formula produces a meaningful answer.
Uninstalled Materials
Materials sitting on-site but not yet incorporated into the structure need special handling. Under current standards, remove the cost of uninstalled materials from your “costs incurred” figure before calculating the percentage of completion, then add the material cost back into revenue separately at zero profit margin. This keeps a large early delivery from artificially inflating your completion percentage. A $200,000 steel shipment in week one does not mean you’re 20 percent done on a million-dollar job.
Costs That Don’t Belong in WIP
Not every dollar the company spends belongs in the calculation. General and administrative overhead unrelated to a specific project, marketing costs, and penalties or fines from project mismanagement all stay out of the “costs incurred” figure. Only costs directly tied to performing the contracted work count. Throwing in unrelated expenses inflates the completion percentage and overstates earned revenue.
Projects Expected to Lose Money
The percentage-of-completion method has a hard asymmetry: profits are recognized gradually as work progresses, but anticipated losses are recognized all at once. Under accounting guidance carried forward from ASC 605-35, once revised estimates show a contract will lose money, book the entire projected loss in the period it becomes evident, not spread across the remaining life of the job.
If you’re 30 percent through a project and revised estimates show it will ultimately lose $200,000, you don’t recognize $60,000 now and the rest later. You record the full $200,000 immediately. The logic is conservative: once you know the project is underwater, pretending otherwise helps no one. A project manager who avoids updating the estimate to completion is just delaying an inevitable hit, and the longer the delay, the bigger the shock when it lands.
What the Finished Number Tells You
Running the calculation once gives you a snapshot. Running it every month gives you a trend, and the trend is where WIP earns its keep.
Profit fade is the most common thing to watch for. A project’s first WIP report might show an estimated 15 percent gross margin. Three months later it’s 12 percent. Six months after that, 8 percent. Each revision to estimated costs at completion chips away at profitability without any dramatic single event. The most frequent causes are optimistic original estimates, untracked scope creep, and poor cost coding that buries overruns in the wrong job. Comparing estimated gross profit percentages across reporting periods for the same project reveals fade early, when you still have options: renegotiate scope, file change orders, tighten subcontractor management, or at minimum adjust your projections.
The WIP schedule also travels outside the company. Surety underwriters treat it as one of the most revealing documents a contractor produces because it breaks profit down job by job. An underwriter can tell whether a weak year came from one bad job or from thinning margins across the whole portfolio, and those two stories lead to very different bonding decisions. Large or aging underbillings, especially on jobs near completion, get particular scrutiny and may be disallowed from working capital, which reduces your bonding capacity. Extreme overbillings raise the opposite concern, suggesting the company is running on client cash. A balanced WIP, with no single project carrying an outsized share of the underbillings or overbillings, is what a healthy contractor’s report looks like.