Work in progress can distort financial statements when it is not tracked correctly. For growing companies in construction, manufacturing, and project based environments, inaccurate WIP reporting can lead to margin surprises, cash flow strain, and poor strategic decisions.
What is WIP in Accounting?
WIP accounting is the method of recording partially completed goods or projects as inventory or contract assets on the balance sheet until they are finished and recognized as revenue.
In other words, work in progress represents costs that have been incurred but not yet recognized as finished goods or final revenue.
Depending on the particular business model, WIP in accounting may consist of:
- Direct labor
- Materials
- Allocated overhead
- Subcontractor costs
- Equipment usage
For manufacturers for example, WIP sits between raw materials and finished goods. For construction and project based firms, WIP tracks performance against contract value and billing.
Why WIP Accounting Matters to Ownership
When WIP accounting is not managed properly, revenue might appear higher/lower than reality, or maybe gross margins fluctuate unexpectedly. Cash flow problems can happen, even when reported profits look strong.
When WIP accounting is handled correctly, leadership can:
- Measure job profitability in real time
- Compare earned revenue to billed revenue
- Identify overbilling and underbilling positions
- Forecast cash requirements more accurately
- Support audit readiness
For companies operating on percentage of completion or longterm contracts, WIP reporting is a must. Lenders, investors, and bonding companies rely on it.
How WIP Impacts Working Capital & Lending Capacity
Revenue and gross profit on the income statement originate from the WIP schedule. Overbillings and underbillings then appear on the balance sheet and affect working capital.
Late stage underbillings can indicate declining job margins that have not yet been recognized. When profit is later adjusted downward, retained earnings and equity are reduced. This can weaken lending ratios and bonding capacity.
Overbillings can improve short term liquidity. However, they are not profit. They represent billings collected in advance of performance. If the margin on the job tightens later, prior profit assumptions may need to be reversed.
For ownership teams seeking growth capital or preparing for acquisition, reliable WIP reporting strengthens financial credibility.
Diagnostic Signs Your WIP Reporting Needs Attention
Ownership should review WIP processes if any of the following are present:
- Inconsistent gross margins: If margins fluctuate month to month without operational explanation, WIP estimates may be inaccurate.
- Large adjustments at year end: Frequent revenue true-ups late in the year indicate weak interim tracking.
- Cash flow doesn’t match profitability: If reported profit is strong but cash remains tight, underbilling or misaligned cost recognition might be contributing factors.
- Limited visibility into job performance: If leadership cannot clearly answer which projects are profitable and which are not, WIP in accounting is probably not being used.
How WIP Accounting Works in Practice
For project based organizations, WIP accounting often relies on percentage of completion methodology.
The general process includes:
- Estimating total contract revenue
- Estimating total expected costs
- Calculating percentage complete based on costs incurred
- Recognizing revenue proportionate to progress
- Comparing earned revenue to billings to determine over or underbilling
For manufacturers, WIP is tracked through inventory systems that accumulate costs until goods are complete. Excess WIP ties up capital, increases storage and handling costs, and may signal production bottlenecks. Monitoring WIP trends over time provides insight into operational efficiency and cash conversion performance.
Accurate forecasting also requires tracking committed costs. Purchase orders, subcontract agreements, and accrued labor obligations must be reflected in projected cost to complete. If commitments are excluded, margins can appear stronger than they are.
How often should WIP be reviewed?
WIP should be reviewed at least monthly. High volume contractors may require more frequent review. Waiting until year end to reconcile WIP will result in corrections that could have been found much earlier.
Signs of Strong WIP Management
When WIP accounting is disciplined and reviewed monthly, ownership sees:
- Predictable gross margins
- Improved cash flow forecasting
- Better pricing decisions on new work
- Greater lender confidence
- Reduced year end adjustments
WIP Accounting vs. Basic Bookkeeping
Basic bookkeeping records transactions after they occur. WIP accounting requires forward looking estimates and operational input.
It involves coordination between project managers, operations, and finance. Estimates must be realistic. Forecasted costs to complete must be reassessed regularly.
WIP schedules must reconcile cleanly to the balance sheet and income statement. If overbilling and underbilling balances do not align with reported financial statements, lender confidence can deteriorate quickly.
Strategic CFO Guidance on WIP Accounting
If revenue has crossed the 10-15 million range, or if projects span multiple reporting periods, WIP accounting needs to be treated as a structured financial process. At that stage, it typically requires oversight from experienced financial leadership familiar with contract accounting, cost behavior, and financial statement impact.
If your organization would benefit from a review of its WIP processes or percentage of completion reporting, Strategic CFO can help. We also offer assistance in other areas such as accounting consulting, restructuring, mergers and acquisitions, interim CFO, retained search and accounting department efficiency.
Schedule a consultation to discuss your current reporting with our outsourced accounting firm.
