WIP Construction Accounting: Best Practices for Accuracy

Managing construction projects while keeping up with construction accounting can feel like juggling. You have projects near completion and new bids, along with projects running into snags that require more attention and resources. Maintaining WIP construction accounting records can be challenging.

However, committing to accurately maintain your financial records, particularly documents relating to work-in-progress (WIP) projects, should be a top priority. Records, like profit and loss records, contracts, and invoices, are necessary for completing financial statement audits, securing bonding, and complying with required financial reporting.

In this post, we’ll discuss a few best practices for WIP construction accounting that help you stay organized and prepared for audits.

Best Practices for WIP Construction Accounting

Managing WIP construction accounting doesn’t have to be overwhelming. With the right approach, you can stay organized and audit-ready year-round.

Follow these three best practices to maintain your WIP construction accounting records.

1. Maintain an Accurate WIP Schedule

One of the most challenging aspects of WIP construction accounting is sticking to an accurate WIP schedule. With so many moving parts, it’s easy to let something, like a profitability assessment, slip through the cracks.

That’s why it’s imperative to maintain an accurate WIP schedule. Consider creating a master spreadsheet for your projects that includes metrics like:

Incurred costs
Total expected costs to complete the project
Total contract revenue
Change orders that affect the total contract value
Percentage of completion
Earned revenue
Billing status
Profit projections

Regularly updating this spreadsheet when new information is available helps you and your team stay on top of your finances. It also makes preparing for an audit easier since you can maintain your financials in a centralized location.

2. Apply Proper Revenue Recognition Methods

In WIP construction accounting, accurate revenue recognition is critical for maintaining reliable financial reporting. Under ASC 606, Revenue from Contracts with Customers, revenue must be recognized in a way that reflects the transfer of promised services to the customer—typically aligned with how project performance obligations are satisfied.

For construction contracts, revenue is generally recognized over time using the input method, which measures progress based on costs incurred relative to total estimated costs. This method provides a clear picture of how much of the project has been completed and how much revenue should be recognized to date.

When applying ASC 606, it’s important to:

Identify performance obligations within the contract (e.g., site prep, building construction, post-construction support).
Recognize revenue over time as work progresses and the customer gains control of the service provided.
Use a reliable measure of progress, such as costs incurred to date, to determine how much revenue to recognize.
Account for change orders and modifications properly—treating them as separate contracts or adjustments to the original contract, depending on their nature.

Applying ASC 606 correctly not only improves the accuracy and transparency of your financial reporting but also ensures you’re aligning with current standards, reducing the risk of audit issues or compliance concerns.

3. Track Job Costs in Real Time

It’s not uncommon for construction projects to run into snags, resulting in an increase in resources, labor, and expenses. Making an effort to track job costs in real time can help you maintain accurate WIP construction accounting records.

When an unexpected event happens, take the time to track job costs in your spreadsheets. Making immediate updates to your records reduces the number of misstatements in later reporting and ensures a clean audit later on. Accurate records also help you predict profitability and prevent overruns.

Prepare for Construction Audits with Confidence

Construction audits are time-consuming and complex, but they’re easier with accurate records. Making an effort to follow WIP construction accounting best practices, such as maintaining your records in real time and accurately classifying your projects, is a worthwhile effort to ensure transparency and accuracy in your financial statements and reporting.

Choosing the right audit firm for your construction industry accounting needs can also ensure a smooth audit. The right auditing partner has relevant construction industry experience and is committed to accurate financial reporting and compliance with regulatory requirements.

At Assurance Dimensions, we work closely with construction companies to streamline the process, identify potential issues in advance, and ensure compliance with minimal disruption to their operations. As Scott Mattson, CPA and Partner at Assurance Dimensions, says, “We understand how complex construction accounting can be. It’s why we’ve committed to creating as little disruption to our clients’ operations as possible.”