In accounting, CIP stands for Construction in Progress, a balance-sheet account that holds every cost a company incurs while building a long-term asset that isn’t ready to use yet. Materials, labor, permits, and certain interest charges all accumulate in the account during the build. Once the asset is ready for its intended purpose, the entire balance moves to a permanent fixed-asset account and depreciation begins. The account exists to keep large one-time construction costs off the income statement during the build phase, so a single quarter’s earnings don’t collapse under spending that will benefit the company for decades.
Why the Account Exists
Accounting follows a straightforward rule: the cost of something should hit the income statement in the same periods as the revenue it helps produce. Spend $50 million building a factory that will run for 30 years, and expensing the whole amount in Year 1 would crush that year’s earnings and make every year after look artificially strong. CIP collects the spending as an asset instead. When the factory opens, depreciation spreads the cost across its useful life, so each year’s income statement carries a proportional share.
Without a holding account like this, any company building its own assets would see wild swings in reported net income during construction years even when operations were steady.
Where CIP Sits on the Balance Sheet
CIP is a non-current asset inside the Property, Plant, and Equipment section, usually shown as its own line alongside land, buildings, and equipment. The balance is the running total of capitalized costs across every unfinished project as of the reporting date.
One feature sets CIP apart from the assets around it: the balance does not depreciate. Depreciation only starts once a completed asset transfers out of CIP and into a permanent fixed-asset category. A company with a large CIP balance is holding value that hasn’t yet begun to decline on paper.
What Costs Belong in CIP
Not every dollar spent during construction ends up capitalized. The account captures costs directly necessary to bring the asset to working condition, which sort into three groups.
Direct Costs
These trace straight to the project: raw materials like steel and concrete, wages for construction workers and on-site engineers, permit and inspection fees, and payments to subcontractors. If the cost wouldn’t exist without the project, it’s direct.
Indirect Costs
Some expenses support construction without being physically built into the asset. Site insurance, temporary power and water, equipment rental, and a reasonable share of construction-management overhead all qualify. The test is whether the cost is necessary for the project and can be reasonably allocated to it.
General and administrative costs the company would incur anyway do not belong in CIP. The CEO’s salary, corporate rent, and the accounting department’s payroll all continue whether or not a building is going up. Those stay on the income statement as period expenses.
Capitalized Interest
When a company borrows money to fund construction, the interest incurred during the build gets folded into the asset’s cost rather than expensed right away. The reasoning is that financing interest during construction is as much a part of creating the asset as the concrete. ASC 835-20 governs the treatment.
Three conditions must all hold for interest capitalization to begin: expenditures for the asset have been made, construction activities are in progress, and interest cost is being incurred. Capitalization continues while all three hold and must stop when construction is substantially complete or when activities are suspended for an extended period. Brief, routine interruptions don’t count.
The amount capitalized is based on “avoidable interest,” the interest that theoretically could have been avoided if the company hadn’t spent money on construction. A capitalization rate is applied to the weighted-average expenditures for the period. There’s a hard ceiling: capitalized interest can never exceed the total interest the company actually incurred that period. Interest that doesn’t exist can’t be created.
Interest capitalization does not apply to assets acquired with restricted gifts or grants, to inventories manufactured in routine large-batch production, or to assets already in use.
When CIP Converts to a Fixed Asset
The trigger for transfer is “substantial completion,” meaning the asset can perform its designed function. A building doesn’t need every punch-list item resolved. A manufacturing line doesn’t need the landscaping finished outside. If the asset works, it transfers.
The journal entry is clean: debit the permanent fixed-asset account (Buildings, Machinery, or whatever fits) for the full accumulated cost, credit CIP for the same amount. The project’s CIP balance drops to zero, and the new fixed-asset account carries the total cost as its basis going forward.
Depreciation starts once the asset is placed in service. For tax purposes, the IRS defines “placed in service” as the date the property is ready and available for a specific use, not necessarily the date it’s first used. Obtaining necessary licenses, completing essential tests, and starting regular operations all serve as evidence of operational readiness.
CIP Isn’t Just for Buildings
Internal-use software projects use the same holding-account logic under ASC 350-40, which splits development into three stages:
- Preliminary project stage: planning, research, and evaluating whether the technology fits the business. Costs are expensed as incurred.
- Application development stage: actual coding, design, installation, and testing. Direct development costs get capitalized, including fees to outside developers, payroll for employees working directly on the project, and interest incurred during development. Training, data conversion, and general overhead are still expensed.
- Post-implementation stage: the software is live. Training and routine maintenance are period expenses.
The application development stage is where a software CIP balance grows. Costs accumulate until the software is ready for its intended use, then the balance transfers to a permanent intangible-asset or fixed-asset account and amortization begins. Companies building complex ERP systems or proprietary platforms can carry meaningful software CIP balances for years.
What Happens if a Project Is Abandoned
Not every project finishes. When a company decides to abandon construction, the accounting shifts from capitalization to impairment under ASC 360-10-35. The company compares the CIP balance against the asset’s expected future cash flows on an undiscounted basis. If the asset has no alternative use, the entire CIP balance is written off as an impairment loss.
Other events can trigger an impairment review before outright abandonment: costs accumulating significantly beyond the original budget, a major adverse change in the business climate, or a significant drop in the expected market value of the finished asset. The standard lists these as examples rather than an exhaustive set, so judgment is required.
Partial abandonments are more nuanced. If a company cancels one wing of a building but continues the rest, CIP costs are allocated between the abandoned and continuing portions, and only the abandoned component is impaired. Reusable materials or salvageable equipment get reclassified to other asset accounts rather than written off.
Once abandonment is probable, the company must stop capitalizing further costs. Any ongoing spending on the abandoned project flows to the income statement as an expense. Footnote disclosures should explain the reason for abandonment, the impairment amount, and the effect on the financial statements.
Tax Treatment Runs on Its Own Track
Tax rules for self-constructed assets operate separately from GAAP. Section 263A of the Internal Revenue Code, the Uniform Capitalization (UNICAP) rules, requires taxpayers to capitalize direct costs and a proper share of indirect costs for any real or tangible personal property they produce. “Produce” is defined broadly and includes constructing, building, installing, manufacturing, and developing property.
Section 263A often demands capitalizing additional indirect costs beyond what a company includes in its book CIP balance. The IRS calls these “additional Section 263A costs,” and they create a permanent difference between the book and tax basis of the asset. Many companies carry a higher asset basis for tax purposes than the balance sheet shows.
Interest capitalization for tax has its own threshold under Section 263A(f) and applies only to property with a long useful life, an estimated production period exceeding two years, or a production period exceeding one year with a cost above $1 million. Section 263A is a timing rule, not a disallowance. Capitalized costs eventually get recovered through depreciation or upon sale.
Disclosures and Judgment Calls
Companies disclose CIP balances in the footnotes, generally covering the total amount, a description of major projects underway, and the interest capitalized during the period. The interest disclosure matters because capitalizing interest simultaneously inflates the asset’s cost and reduces reported interest expense on the income statement. Both figures are needed to understand true borrowing costs.
CIP draws consistent audit attention because it involves significant management judgment: which costs to capitalize, when to stop, and when the asset is substantially complete. Each major project should have its own sub-account rather than being lumped into a single CIP line, which makes it easier to trace costs, reconcile contractor invoices, and identify when a specific project is ready to transfer.
When projects undergo scope changes and previously planned components get cut, costs already capitalized for those components need to be reclassified out of CIP and expensed. Companies that miss these mid-project adjustments end up with inflated asset balances that overstate PP&E and understate expenses. It’s one of the most common CIP-related findings in financial statement audits.