What is work in progress accounting? How to track cash flow & liquidity in construction

A construction project that appears profitable on paper can rapidly erode your group-wide liquidity when operational data is siloed. For a CFO, the primary risk is the delay between the job site and the General Ledger. When project managers track costs in isolation, the finance team is forced to operate on lagging data, leading to late recognition of job-cost spikes.

On larger and more complex projects, this can lead to writedowns, pressure on working capital, and uncomfortable conversations with surety providers. The PM-to-CFO communication gap is a key reason, according to LogiKal, why two-thirds of projects don’t deliver on most or all of their objectives.

Work in progress accounting helps you close that gap. Connect your accounting software to your PM’s cost tracking tools and project schedules. That way, both teams work toward a single source of truth and can act on minor issues before they become bigger problems.

Full breakdown of construction work in progress (WIP) accounting

A construction work in progress (WIP) report compares two metrics:

• The revenue you’ve earned so far on a project
• The amount you’ve billed the customer.

From this, you see whether you’ve billed too much, not enough, or roughly the right amount for the value of work you’ve performed to date.

Common instances of misreported WIP include:

• Overbilling: This can make it seem like you're ahead financially even when the underlying costs say otherwise, masking issues and leading to premature capital allocation that the group cannot actually sustain.
• Underbilling: This can make an otherwise healthy project appear unprofitable on paper, stalling your ability to recycle working capital into new projects and unnecessarily tightening the group’s liquidity posture.

In these cases, your overall accounts may not reflect your actual level of profitability in a given period, making accurate planning and strategy difficult.

Other project-based industries use WIP, like architecture and other long-cycle project businesses. It’s most common in the construction sector, though, because costs frequently change, margins are very tight, and payments often arrive later than contractors need them.

Key components of the WIP report

WIP reports provide a live snapshot of the progress, cost, and billing on a project.

They assist companies in protecting profitability and managing cash flow, especially on longer, more complex jobs. Without one, projects are more likely to overrun, require write-downs, or burn through the entire budget.

The key components of a WIP report are:

• Total contract value: This is the ceiling on job revenue and consists of the full agreed price for the job, plus any approved change orders and allowances, such as material cost adjustments.
• Cost incurred to date: This is what the general ledger shows you’ve spent so far on labor, materials, and job-related overhead like plant hire and site supervision.
• Estimated cost to complete: This is the PM’s forecast on how much you need to spend to finish the work, including any contingency. This figure is the critical bridge between field operations and financial oversight; if the PM’s estimate is disconnected from the finance team’s reporting structure, it introduces significant governance risk and undermines the accuracy of your WIP schedule.
• Over or underbilling: This is the gap between revenue recognized and invoices issued and shows whether you’re ahead or behind on cash flow versus earned profit.

Taken together, a WIP shows you:

• Whether a project is on track
• How much gross profit remains
• Whether you're funding the job from your own reserves or using customer payments

Example: You’re six months into a nine-month $2 million commercial office build. Your ledger shows $1.4 million in costs to date, and your PM’s estimate to complete it $500,000, taking the total to $1.9 million. But you've billed the client $1.6 million, even though only 74% of the work is done. That means you've recognized about $1.48 million in revenue but invoiced $1.6 million, resulting in an overbill of roughly $120,000.

Last month, your estimated total cost was $1.8 million, so you expected a $200,000 gross profit on the $2 million contract. With the estimate now at $1.9 million, profit has faded by 50%. You realize that, if costs keep rising, you’ll get through the overbilling cushion and start covering overruns with your working capital.

Why is the WIP report important?

WIPs provide important insights into the four major aspects of the progress of a job:

Financial statements

WIPs hold the project's cost to date, billing to date, and estimated final costs in one place. WIPs allow CFOs to classify underbilled work as a contract asset and overbilled work as a contract liability. This stops companies from overstating their assets, equity, or job profitability on so-far-undelivered work.

Lenders and surety providers rely on them when deciding how much bonding and credit to offer. As construction bonds can cost between 1-3% of a contract’s value, they scrutinize your WIP data for signs of risk. If your WIP shows unbilled work that has aged beyond expected billing cycles, or significant unexplained swings in profit, they see higher risk and may cap your bonding capacity or tighten terms.

Cost management

You get to see problems early, like if the cost to date plus estimated cost to complete is higher than the contract value. You know that you’re on course to make a loss on the job.

In a Procore survey, construction professionals reported that nearly half of their projects were behind schedule and over budget. Such a high figure among experienced contractors shows how easily project performance can drift from target.

When a WIP signals that a job is heading for a loss or there is the beginning of profit fade, you have a chance to step in early, adjust scope or methods, and bring costs back under control within the contract terms.

Project monitoring

You can track operational milestones to financial performance with a WIP report. They show why your margin is being cut into, like project delays, reworking, or scope changes. Rework is a major source of profit loss, with one analysis stating that rework accounts for about 5% of overall construction costs, or $65 billion.

Over time, you can use WIP to spot behavioral patterns with repeat customers. Adjust your future quotes to protect against risks like longer timelines and greater supervision needs.

Profit fade and credibility

Profit fade occurs when expected gross profits steadily decline as the project progresses. Common causes include overly optimistic pricing or delays that push up labor and overhead costs.

Baseline risk in construction is high, and swings from projected profit to actual loss, which partly explains the construction business failure rate of about 37% over three years.

Because of this risk, auditors, lenders, and surety providers place a high level of importance in your WIP reports for signs of profit fade or repeated profit erosion across jobs.

Regular WIP reviews make it easier to catch profit fade early, keep projects on track, and show a clearer picture of overall performance.

Why do traditional WIP reports fail?

If your project tools aren’t connected to your accounting/WIP system, your WIP depends on whatever the project team manually sends across, rather than drawing from a single shared set of live numbers.

WIP breakdowns aren’t the fault of your experienced PM or finance teams. It’s a data flow problem, not a skills issue.

The data silo problem

Your project manager, who is not a finance professional, has their own system. They track metrics like percentage complete, change orders, and expected costs in their files.

Your finance team can’t access those files in real time and only gets a snapshot at the end of the month. The accuracy of your records depends on your finance team interpreting and entering your PM’s figures, with no margin for error.

Even if errors don’t creep in at this stage, there is another problem. By the time the PM’s spreadsheet reaches the finance team, it’s out of date and unsuitable for making decisions. This is the PM-to-CFO communication gap, and it’s a real issue in many construction firms.

A key reason for this is the use of disconnected tools and files. Newforma data shows that seven in 10 architecture, engineering, and construction firms use tools that don’t integrate with each other.

You can give your company a lead by adopting one of the fastest emerging trends in construction technology — integrating tools across departments to create a single source of truth for everyone, ending the data silo issue.

The risks of manual spreadsheets

With an integrated software package, you set the rules for revenue recognition, cost categorization, and approval workflows. The system then follows them uniformly on all projects.

With manual spreadsheets, each new job requires a new spreadsheet. There is no central control over which accounting policies or calculations are used. The risks compound quickly:

• Version control failures: There are multiple copies of a project WIP circulating between the PM, controller, and CFO with no single source of truth.
• Inconsistent formulas: The way POC, overheads, and cost allocations are calculated varies from jobs and even between individual team members.
• Missing audit trails: Little or no documentation exists on changes to cost-to-complete estimates or revenue recognition, who made them, when, or why.
• Close period complexity: It’s challenging for finance teams to reconcile multiple WIP spreadsheets against tight deadlines to keep the general ledger accurate and reliable.

Bad data costs the industry a lot of money. According to Autodesk and FMI’s 2021 report Harnessing the Data Advantage in Construction, bad or incomplete data may have cost the global construction sector around $1.85 trillion.

When you integrate project management and accounting software, users record costs, billings, and change orders post once to a shared database and there’s live managerial oversight.

Change flows are visible, not buried in overwritten cells. WIP calculations draw directly from the general ledger and job costing modules. And real-time reconciliation makes the data trustworthy even when deadlines are tight or project conditions change.

3 ways the WIP report helps protect your margins

WIP reports, fed by live, central data, give CFOs and finance teams the information they need to project job margins and plan liquidity across the business as a whole.

1. Assists with proactive management of working capital

According to Rabbet’s 2023 Construction Payments Report, the estimated cost of slow payments to contractors and subcontractors in 2023 was 14%. Late payments delayed or stopped project work in the same year for 78% of subcontractors.

Working capital matters, especially in sectors working to wafer-thin margins. Live WIP reports highlight underbilling in real time.

If your current set-up means you can only close the books at or after the end of a month, you may miss weeks when costs are rising faster than billings. Instead of waiting to issue progress invoices or chase approvals to bill work already done, you spot the gap early and act while there’s still time to protect cash flow.

A connected WIP schedule shows you when jobs are approaching milestones under their governing construction contracts and which change orders are ready to bill.

WIP reports are working capital planning tools that help you time billing correctly and chase up outstanding invoices so cash flow stays ahead of expenditure on each project.

2. Safeguards bonding capacity

Construction firms rely on bonding capacity to provide the funding for many of the projects they work on. They’re critical when pitching public-sector or high-value private-client contracts.

Bonds consist of two parts:

• Single-project limit (the largest bond for one job)
• Aggregate limit (the total value of all outstanding bonded work at one time)

Lenders and surety providers want to see audit-ready WIP reports to demonstrate a history of:

• Billing jobs in line with actual progress
• Updating estimated costs to complete regularly and realistically
• Reporting gross profit conservatively, not on overly optimistic assumptions

The more reliable your WIP reporting, the more confidence surety providers have in maintaining or increasing your bonding limits.

Andy Roberts of surety provider Rancho Mesa Insurance Services, Inc. recently noted that “being able to provide a current and accurate work in progress (WIP) schedule will be a requirement from a surety underwriter.”

3. Enables continuous business intelligence

Recent Deloitte-commissioned research found that over 80% of construction firms still have room to improve their data management. They discovered that managers and executives in construction firms spend an average of 11.5 hours per week on construction data analysis searching for and analyzing data.

Centralized live and historic WIPs provide vital business intelligence to PMs, CFOs, and boards, including the ability to:

• Break down performance by customer, project manager, work type, or region to see where profit patterns vary.
• Spot specific reasons for margin fade, such as customers who push change orders into later phases and the types of work where your margin is consistently low.

Seeing this now rather than later means you can step in earlier on struggling jobs before your margins and cash flow are hit.

How to power your WIP with the right technology

Move beyond static, spreadsheet-based WIPs and choose a system that connects job costing, project management, billing, and your general ledger. Discard information silos in your business and replace them with a centralized, constantly accurate database.

Build the business case for modernization

Excel-powered WIP carries real financial risks. Delayed billing affects cash flow and lack of control over project costs and revenue recognition hits profitability. Beyond individual projects, repeated underperformance could cause future bonding issues that constrain your ability to take on and fund new work and larger contracts.

Lead the case for investment by using previous projects that have missed their targets. Show how a fit-for-purpose WIP would result in:

• More effective risk mitigation: Explain what you would have done if you’d seen an issue three or four weeks earlier, such as labor costs creeping above target, and what benefits your action would have delivered.
• Stronger liquidity planning: Show how you could have tied billing closer to project milestones, meaning you send over invoices earlier and get working capital into the business sooner.
• Support for future bonding capacity: Show board members side-by-side the WIP report from a job that underperformed next to one without those problems and ask which they think would secure the funding.

Integrated WIP systems are part of a broader move to automation in construction.

Eliminate siloed data

Connected systems mean finance staff no longer have to re-enter data from your PM to the general ledger.

Whenever a colleague makes a time entry, purchase order, or alters processes on one device, it changes on the database and on every other device. This breaks down the traditional PM-to-CFO communication gap that affects the accuracy of WIP reports.

AI tools offer further improvements to internal processes, too.

AI accounting automates repetitive tasks, like transaction categorization and invoice reminders. This frees up your finance team to high-value strategic work like forecasting, scenario planning, and margin improvement.

Choose the right system

The project management and accounting systems you choose need to support the percentage-of-completion method and provide tight integration between job costing and the general ledger.

Intuit Enterprise Suite includes features like:

• Advanced job costing: By leveraging detailed cost and revenue tracking at the job, sub-job, and phase levels, the system automates the data flow into your WIP calculations. This ensures that the financial statements reflect the project's actual economic reality, reducing the risk of mid-quarter surprises or significant year-end adjustments.
• Job-to-date reporting: Job-to-date reporting allows you to monitor committed costs versus actuals in real time. This visibility enables you to identify early signs of margin fade and cost overruns before they erode project profitability or impact group-wide liquidity.
• Integrated billing: Integrated billing features allow you to generate precise progress billings based on verified project data. This minimizes the risk of underbilling, accelerates the cash conversion cycle, and ensures you are maximizing working capital across your entire project portfolio.

Boost productivity and enhance profitability

WIP accounting is more than a reporting requirement; it is a critical lever for margin protection and enterprise-wide liquidity management. For firms managing long-term contracts, staged deliveries, or milestone-based projects, transitioning to a robust WIP framework ensures that your financial statements reflect the true economic status of every engagement.

Discover how Intuit Enterprise Suite can enhance your billing accuracy and project governance.