Yes. Construction in Progress is a fixed asset, and both U.S. GAAP and IFRS report it inside Property, Plant, and Equipment (PP&E) as a non-current asset. What makes it different from the other fixed assets on the balance sheet is that it’s temporary: the account gathers project costs while work is underway and carries no depreciation until the finished asset is placed in service.
Where CIP Sits on the Balance Sheet
CIP appears under PP&E next to finished categories like Buildings, Machinery, and Vehicles, but it gets its own line so anyone reading the statements can see how much capital is tied up in projects that aren’t yet operational. Two things justify that placement. The project represents a future economic benefit the company controls, which is the definition of an asset. And the company intends to use the finished product for years rather than sell it in the short term.
Expensing construction spending as it occurred would understate assets and overstate losses in any period with heavy building activity, giving investors and lenders a distorted view of the business.
What Costs Build Up the CIP Balance
A CIP account captures the direct and indirect costs needed to bring the asset to a usable state. The running balance grows through the life of the project and becomes the finished asset’s total cost basis at completion.
Direct Costs
Direct costs are the ones you can trace straight to the project: raw materials such as steel, concrete, and lumber; payments to outside contractors and subcontractors; permits and inspection fees; and equipment bought specifically for the project. If the cost wouldn’t exist without the construction project, it generally belongs in CIP.
Internal Labor
Salaries paid to your own employees can be capitalized into CIP, but only when the work is specifically identifiable and directly tied to the project. Employees acting as an architect, construction manager, electrician, or another hands-on construction role qualify. Their hours have to be tracked by person and by project and capitalized at the employee’s hourly rate. Time loosely allocated across several projects after the fact doesn’t qualify.
Demolition and Site Preparation
If you buy land with an existing structure and plan from the start to tear it down and build something new, both the purchase price and the demolition costs get allocated to the cost of the land, not to the new building’s CIP account. Land isn’t depreciated, so this allocation matters for future depreciation. If you’re only gutting and rebuilding the interior of an existing building, the demolition costs go into CIP for the new construction.
When demolition wasn’t part of the original acquisition plan, say a structure that deteriorated years after purchase, the demolition costs are generally expensed immediately rather than capitalized. Site preparation costs with limited useful lives, such as grading, paving parking areas, or installing fencing, are typically capitalized as land improvements and depreciated separately from both the land and the building.
Interest During Construction
How interest on debt used to fund a project affects the CIP balance depends on the accounting framework.
Private and Public Companies Under U.S. GAAP
Under ASC 835-20, companies following U.S. GAAP must capitalize interest costs incurred during the construction of a qualifying asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use — a building, a major piece of built-to-order equipment, or a large software platform. Interest paid while construction is underway gets added to CIP rather than hitting the income statement, keeping earnings from being dragged down during a period when the asset isn’t yet producing revenue.
Capitalization begins when spending on the project starts, construction activities are underway, and interest costs are being incurred. It stops when the asset is substantially complete and ready for use. If construction halts for an extended period unrelated to the project, such as a permitting dispute, interest capitalization pauses during the delay.
Government Entities Under GASB 89
Governments follow a different rule. GASB Statement No. 89 requires state and local governments to recognize interest costs incurred before the end of a construction period as an expense in the period they occur, not as part of the asset’s cost. That’s the opposite of the private-company rule. If your organization prepares statements under governmental accounting standards, interest on construction debt goes straight to the income statement.
Companies Reporting Under IFRS
IAS 23 requires companies reporting under IFRS to capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset, defined as one that “necessarily takes a substantial period of time to get ready for its intended use or sale.”1IFRS Foundation. IAS 23 Over-Time Transfer of Constructed Good All other borrowing costs are expensed in the period incurred. The practical result is similar to U.S. GAAP: interest on construction financing gets folded into the asset’s cost.
Why CIP Is Not Depreciated
Even though CIP sits inside PP&E, it isn’t depreciated while construction is ongoing.2Internal Revenue Service. Tangible Property Final Regulations – Frequently Asked Questions Depreciation spreads the cost of an asset over the periods it helps produce revenue. An unfinished building produces no revenue, so there’s no basis for the allocation. Depreciating CIP would reduce book value before the asset ever contributes to operations and misrepresent the company’s financial position.
Once the asset is placed in service and reclassified, the company selects a depreciation method (straight-line, declining balance, or units of production) and determines the useful life. Depreciation runs from the placed-in-service date forward, and the accumulated CIP balance becomes the depreciable basis of the finished asset.3Internal Revenue Service. Depreciation Reminders
Moving CIP to a Permanent Fixed Asset Account
CIP is a holding account. When a project reaches the finish line, the accumulated balance moves out of CIP and into a permanent fixed asset category such as Buildings or Machinery. The entry credits CIP (zeroing it out for that project) and debits the appropriate fixed asset account for the full amount.
The Placed-in-Service Standard
Reclassification is triggered by the placed-in-service date, meaning the point when the asset is ready and available for its intended use, even if the company hasn’t actually started using it yet.3Internal Revenue Service. Depreciation Reminders A completed warehouse is placed in service when it passes final inspection and can receive inventory, not when the first shipment arrives. Pinpointing that date takes coordination between the construction team and accounting because it determines when depreciation begins and when interest capitalization stops.
Delaying reclassification past the true placed-in-service date understates depreciation expense and overstates asset values. Reclassifying too early, before the asset is genuinely ready, starts the depreciation clock prematurely.
Partially Complete Projects
Not every project finishes all at once. A multi-building campus, a phased manufacturing expansion, or a road with multiple lanes can have portions that are functional while other sections are still under construction. When a self-sufficient portion can perform its intended function, that portion can be reclassified and begin depreciating even while the rest of the project stays in CIP. If one wing of a hospital is operational while the second wing is being built, the costs attributable to the completed wing move to the permanent asset account and the remainder stays in CIP.
When the CIP Balance Can Lose Value
CIP isn’t immune from impairment. Under ASC 360, a company must evaluate any long-lived asset, including one still under development, for impairment whenever events or changes in circumstances suggest the carrying amount may not be recoverable. Common triggers for CIP include a sharp decline in the market for the product the facility was designed to produce, a cost overrun that makes the project economically unviable, or a regulatory change that eliminates the need for the asset.
The test itself is a recoverability check: compare the sum of estimated undiscounted future cash flows the asset is expected to generate once completed against its current carrying amount. If the cash flows exceed the carrying amount, no impairment exists. If they fall short, the loss is measured as the difference between the carrying amount and fair value. For assets still under development, the cash flow estimates have to reflect the asset’s service potential when finished and must include the additional costs needed to complete it.
If a company abandons a CIP project entirely and the asset has no alternative use, the remaining balance is written off as a loss. The entry debits an impairment loss and credits CIP, removing it from the balance sheet. Partial abandonment, scaling back to a smaller project, calls for the same recoverability analysis on the reduced-scope version.
What Gets Disclosed Beyond the Line Item
Companies with significant CIP balances have disclosure obligations that go past the single line item. Public companies reporting to the SEC discuss material commitments for capital expenditures in Management’s Discussion and Analysis, including the general purpose of ongoing commitments and how they will be funded.4U.S. Securities and Exchange Commission. Financial Reporting Manual – Topic 9 The discussion should cover material trends in the mix of equity, debt, and off-balance-sheet financing supporting the projects.
Public and private companies following GAAP also typically disclose the nature of major projects in the financial statement footnotes, including expected completion timelines, amounts spent to date, and estimated remaining costs. When a construction project involves a contractor relationship falling under ASC 606, additional disclosures about contract assets and liabilities may apply. These footnotes give investors and lenders the context to judge whether a large CIP balance represents a sound investment or a risk worth watching.