Quick answer

US contractors recognise revenue on long-term contracts over time under ASC 606, most commonly using the cost-to-cost input method: percentage complete equals costs incurred to date divided by total estimated costs, and earned revenue equals that percentage multiplied by the total contract price.

The difference between earned revenue and amounts billed produces two balance sheet items: costs and estimated earnings in excess of billings (underbillings, a contract asset) and billings in excess of costs and estimated earnings (overbillings, a contract liability).

The WIP schedule is the report that ties all of this together, job by job. It is the single most important document in contractor accounting, it is the first thing a surety or lender asks for, and it is the tool that surfaces margin fade - declining estimated gross profit on open jobs - while there is still time to react.

For tax, long-term contracts generally fall under IRC Section 460 and its percentage-of-completion requirement, subject to exceptions for home construction contracts and for smaller contractors on shorter contracts.

Why construction accounting is different

Four features make it so.

Contracts span periods. A job started in October and finished in April has to be measured at 31 December, and that measurement depends on an estimate.

The estimate drives the accounting. Under cost-to-cost, revenue depends on total estimated cost. Change the estimate, and you change reported revenue and profit for every period the job has been open. No other industry has its financial statements this directly dependent on a forward-looking operational judgement.

Billing and earning are decoupled. You bill on a schedule of values, an AIA application, or milestones. You earn as you incur cost. These rarely align, and the gap is both an accounting entry and a cash flow reality.

Retainage delays cash. Typically 5% to 10% of every billing is withheld until completion and acceptance, sometimes for months after the work is done.

Job costing is the foundation

Nothing above works if job costing is wrong. Every cost must land on the right job, in the right cost code, in the right period.

The cost categories

Category	Contents	Common error
Direct labour	Field wages by job and cost code	Recorded at base wage without burden
Labour burden	Payroll taxes, workers' compensation, general liability, union benefits, PTO	Left in overhead, understating job cost
Materials	Purchased materials allocated to the job	Charged when purchased rather than when installed
Subcontractors	Sub invoices by job and cost code	Committed cost not tracked against the estimate
Equipment	Owned equipment usage rates and rentals	Owned equipment charged at zero, distorting job margin
Other direct costs	Permits, bonds, disposal, temporary facilities	Absorbed into overhead

Labour burden is where most contractors understate cost

A field employee at $32 per hour does not cost $32 per hour. Add employer payroll taxes, workers' compensation at the rate for that class code, general liability, union or benefit contributions, and paid time off, and the true cost commonly runs 25% to 45% above base wage - considerably more for high-risk class codes.

If you job-cost at base wage, every job looks more profitable than it is, and your estimating gets worse over time because it is calibrated against understated history.

Calculate a burden rate per class of labour, apply it as labour is costed, and true it up quarterly.

Cost codes

Use a consistent cost code structure across every job - a standard framework such as the CSI divisions, or your own, but the same one every time. Cost codes that vary by job make historical analysis impossible, and historical analysis is how estimating improves.

The WIP schedule, anatomy and example

A WIP schedule contains one row per open job and these columns:

Column	Derivation
Contract price	Original contract plus approved change orders
Estimated total cost	Current estimate at completion, updated monthly
Estimated gross profit	Contract price less estimated total cost
Cost to date	Actual costs incurred
Percent complete	Cost to date ÷ estimated total cost
Earned revenue	Percent complete × contract price
Billed to date	Cumulative billings
Underbilling	Earned revenue − billed, where positive
Overbilling	Billed − earned revenue, where positive

Worked example

Job	Contract	Est. total cost	Est. GP	GP %	Cost to date	% complete	Earned revenue	Billed to date	Over/(under) billed
118	$1,200,000	$1,000,000	$200,000	16.7%	$600,000	60.0%	$720,000	$650,000	$(70,000)
122	$800,000	$700,000	$100,000	12.5%	$560,000	80.0%	$640,000	$710,000	$70,000
127	$2,000,000	$1,880,000	$120,000	6.0%	$1,410,000	75.0%	$1,500,000	$1,400,000	$(100,000)
Total	$4,000,000	$3,580,000	$420,000	10.5%	$2,570,000		$2,860,000	$2,760,000	$(100,000)

On the balance sheet, Job 122's $70,000 is a contract liability, and the $170,000 of underbillings on Jobs 118 and 127 is a contract asset. They are presented gross, not netted.

How to read a WIP schedule

Margin fade

Job 127 was bid at 15% gross profit on a $1,700,000 cost estimate. The current estimate is $1,880,000, taking gross profit to 6%. That is margin fade, and it is the most important signal on the schedule.

Track estimated gross profit percentage per job across months. A job whose margin declines steadily is telling you something - poor original estimate, scope creep being performed without approved change orders, productivity below plan, or a subcontractor problem. Catching it at 75% complete is bad. Catching it at 30% complete is actionable.

Fade also has an accounting consequence: because the revised estimate is applied cumulatively, the profit reduction lands in the current period. A job that fades late produces a nasty single-period hit.

Underbillings

Job 127 has earned $1,500,000 and billed $1,400,000. That $100,000 is work performed that has not been invoiced.

Underbillings are an asset, but they are frequently a warning rather than good news. Common causes:

• Unapproved change orders. Work performed on instruction without a signed change order. The most common and most dangerous cause.
• Billing lag. Applications submitted late.
• Cost overruns. Costs running ahead of the schedule of values, which inflates percent complete without a corresponding billing right.
• Estimate error. Total estimated cost understated, overstating percent complete and therefore earned revenue.

The last two matter because they mean the underbilling may never be collectible. Investigate every material underbilling; do not treat it as an account receivable in waiting.

Overbillings

Job 122 has billed $70,000 more than earned. Front-end loading a schedule of values is normal practice and is a legitimate working capital tool.

The danger is treating it as profit. Overbillings are a liability - they represent work owed. A contractor whose cash position depends on aggregate overbillings across a portfolio is financing operations with money that has to be worked off, and a slowdown in new work exposes that immediately.

The classic failure pattern: a contractor with large overbillings, healthy cash, and a shrinking backlog. As jobs complete, the overbillings unwind, cash falls, and there is no new front-loaded billing to replace them.

ASC 606 and measuring progress

Under ASC 606, revenue is recognised over time when any of three criteria is met. Most construction contracts qualify under the third: the contractor's performance creates an asset with no alternative use, and there is an enforceable right to payment for performance completed to date.

Progress is measured using either an input method (cost-to-cost, labour hours) or an output method (units delivered, surveys of performance completed). Cost-to-cost is dominant because it is objective and auditable.

Uninstalled materials

A specific ASC 606 issue that catches contractors out. Where significant materials have been procured but not yet installed, including their cost in the cost-to-cost calculation overstates progress - you have not performed, you have purchased.

The treatment is to recognise revenue on those materials at cost, with zero margin, and exclude them from the percentage-complete calculation until installed. This is common with items such as switchgear, elevators, HVAC units and custom fabrication.

Change orders

Approved change orders adjust the contract price and the estimate directly.

Unapproved change orders and claims are variable consideration, included in the transaction price only to the extent it is probable that a significant reversal will not occur. In practice, that means you cannot simply add disputed work to the contract price because you believe you will win.

Maintain a change order log per job showing submitted, approved, rejected and pending, with amounts and dates. It is the supporting document for both the accounting and any subsequent claim.

Retainage

Retainage receivable - typically 5% to 10% - should be tracked separately from trade receivables and aged by job. It is not a collection problem in the ordinary sense; it is a contractual withholding with defined release conditions.

Retainage payable to your subcontractors should be tracked in the same way. Contractors routinely forget they are holding sub retainage and treat the cash as available.

Retainage that has been outstanding beyond its release conditions is a dispute, and should be assessed for collectability like any other receivable.

Tax treatment is not the same as book treatment

Under IRC Section 460, long-term contracts generally must use percentage-of-completion for tax purposes, with limited exceptions:

• Home construction contracts, which are exempt.
• Small contractor exception, for contracts expected to be completed within two years where the contractor's average annual gross receipts fall below the inflation-indexed threshold under Section 448(c). That threshold has risen substantially from its original $10 million and continues to be indexed - confirm the figure for your tax year.

Contractors using percentage-of-completion for tax are also subject to the look-back method on completed long-term contracts, which recalculates prior-year results using actual figures and computes interest on the resulting over- or under-payment.

The practical point: it is entirely normal for a contractor to use one method for financial statements and another for tax, and to maintain a deferred tax reconciliation between them. Have this conversation with your tax adviser before year end, not during the return.

The contractor's monthly close

In addition to a standard close, contractors need:

1. Update every job estimate. Not just the jobs someone mentioned - every open job, with the project manager's input. This is the step most often skipped and it invalidates the entire WIP schedule when it is.
2. Review job cost detail for miscoded costs. A cost on the wrong job distorts two jobs at once.
3. Rebuild the WIP schedule and post the period's revenue adjustment.
4. Review margin movement by job against last month.
5. Reconcile committed costs - open POs and subcontracts - against the estimate to complete.
6. Age retainage receivable and payable.
7. Update the change order log.
8. Recalculate backlog - contract value remaining to be earned.

What sureties and lenders look for

If you carry bonding, your WIP schedule is read by an underwriter, and they are looking at:

• Working capital and its quality - underbillings and retainage are often discounted or excluded
• Margin fade across open jobs
• Overbillings as a share of working capital
• Backlog and its profitability
• Job concentration - reliance on one project or one owner
• Consistency between the WIP schedule and the financial statements

A clean, internally consistent WIP schedule produced monthly does more for bonding capacity than almost anything else within a contractor's control.

Five mistakes that cost real money

1. Updating estimates only when a problem is obvious. Estimates must be revised every month on every job, whether or not anyone has raised a concern.
2. Job costing labour at base wage. Every job looks better than it is, and estimating degrades accordingly.
3. Performing unapproved change order work. It shows up as an underbilling, may never be collected, and inflates reported revenue in the meantime.
4. Netting overbillings and underbillings. They are separate balance sheet items and must be presented gross. Netting them hides the position from you as well as from the reader.
5. Treating overbilling cash as profit. It is a liability funded by future work.

 

Frequently asked questions

What is a WIP schedule in construction accounting? A work-in-progress schedule is a job-by-job report showing contract price, estimated total cost, estimated gross profit, costs incurred to date, percentage complete, revenue earned, amounts billed, and the resulting over- or underbilling. It reconciles job-level performance to the financial statements and is the primary document reviewed by sureties and lenders.

How is percentage of completion calculated? Most commonly using the cost-to-cost method: costs incurred to date divided by total estimated costs at completion. That percentage is applied to the total contract price to determine revenue earned to date. The current period's revenue is the cumulative earned revenue less revenue recognised in prior periods.

What is the difference between overbillings and underbillings? Underbillings, formally costs and estimated earnings in excess of billings, arise when earned revenue exceeds amounts billed and are recorded as a contract asset. Overbillings, billings in excess of costs and estimated earnings, arise when billings exceed earned revenue and are recorded as a contract liability. They are presented gross, not netted.

What is margin fade? A decline in a job's estimated gross profit percentage over time as the estimated cost at completion increases. Because revised estimates are applied cumulatively, fade discovered late produces a concentrated hit to current-period profit. Tracking gross profit percentage by job month over month is the standard early-warning control.

Do small contractors have to use percentage of completion for tax? Not always. IRC Section 460 exempts home construction contracts, and provides a small contractor exception for contracts expected to be completed within two years where average annual gross receipts fall below the inflation-indexed Section 448(c) threshold. Confirm the current threshold for your tax year with your tax adviser.

How should uninstalled materials be treated under ASC 606? Where significant materials are procured but not yet installed, revenue is recognised at cost with zero margin, and those costs are excluded from the cost-to-cost percentage-complete calculation until installation. This prevents procurement from overstating performance.

How often should a WIP schedule be prepared? Monthly, with every open job's estimate at completion updated as part of the process. A quarterly WIP schedule is too infrequent to catch margin fade while it is still actionable.

Staunch Fintech provides job costing, WIP schedule preparation and month-end close support for US contractors, working inside your existing construction accounting software. If your WIP schedule is currently rebuilt in a spreadsheet each quarter - or not at all - send us a recent job cost report and we will show you what a monthly cycle would look like.