What is WIP in construction accounting, and why does it decide your year?

WIP — work in progress — is the gap between what you've earned on a job and what you've billed for it. Get it right and your P&L tells the truth every month. Get it wrong and you find out in August that the job you thought made 12% actually made 4%, and by then the money is gone.

Most builders we meet do a WIP schedule once a year, for the accountant, under duress. That is the single most expensive habit in the industry. Done monthly, it takes about fifteen minutes a job.

What does WIP actually measure?

Every progress claim is an estimate. You claim against a schedule someone agreed months ago; costs land on a different rhythm entirely. WIP is the reconciliation between the two. The maths is not complicated:

1. Percentage complete = costs to date ÷ total forecast cost

2. Earned revenue = percentage complete × contract value (including approved variations)

3. Over- or under-claimed = amount claimed to date − earned revenue

If you've claimed more than you've earned, you're over-claimed — you're holding the client's money and your P&L is flattering you. If you've claimed less, you're under-claimed — you've done work you haven't been paid for, and your P&L is understating a profit you've already made.

Both are dangerous. Over-claiming feels like cash and ends in a lean back-end where you finish the job on your own money. Under-claiming means you're financing the client for free.

A worked example: the $2.4M fitout

A $2.4M fitout with a forecast cost of $2.04M — a 15% margin on paper. Four months in, the numbers look like this:

• Contract value (incl. approved variations): $2,400,000

• Total forecast cost: $2,040,000

• Costs to date: $1,224,000 — so percentage complete is 60%

• Earned revenue (60% × $2.4M): $1,440,000

• Claimed to date: $1,620,000

• Over-claimed: $180,000

That $180,000 is not profit. It is a liability sitting in the bank account looking exactly like a good month. Forty per cent of the job is still to build, and only 32.5% of the contract is left to claim against it.

Now change one number. Say the forecast cost has crept to $2.19M because of a subcontractor variation nobody re-forecast. The margin is no longer 15% — it's 8.75%. On the annual WIP schedule you'd find that out in about nine months. On the monthly one you find it out this Thursday, while you can still argue the variation, re-sequence the trades, or at minimum stop quoting the next three jobs off a margin that doesn't exist.

That drift has a name — profit fade — and in Australian commercial construction it routinely runs 5 to 12 margin points between tender and final account. We've written about where it hides in why your 18% tender becomes a 6% job.

The 15-minute monthly discipline

Per job, once a month, in this order.

1. Update the cost-to-complete, not just the cost-to-date (5 minutes). This is the step everyone skips, and it's the only one that matters. Costs to date come out of Xero on their own. Cost-to-complete requires a human — usually the PM — to say what's genuinely left. Ask for it as a number, not a feeling.

2. Add approved variations to the contract value (3 minutes). Only approved ones. Unapproved variations belong on a separate register with an owner and a date. If a variation has been sitting unapproved for more than 30 days it is a debt collection problem, not a paperwork problem.

3. Recalculate percentage complete and earned revenue (2 minutes). The spreadsheet does this. If the percentage complete moves backwards, that's not an error — that's the cost-to-complete telling you the truth for the first time.

4. Compare to claims and flag the position (2 minutes). Over-claimed, under-claimed, by how much, moving which way.

5. Compare this month's forecast margin to last month's (3 minutes). One line per job. A margin that falls two months running is a job in trouble, regardless of what the site report says.

Five steps. Fifteen minutes. For a builder running six concurrent jobs, that's an hour and a half a month to know exactly where you stand — which is roughly the amount of time most owners spend re-reading a bank balance and guessing.

What do you do with the answer?

A WIP schedule you file is worthless. A WIP schedule that changes behaviour is worth more than your accountant.

• Over-claimed by more than 5% of contract value? Hold that cash aside mentally. It funds the back end of the job, not the deposit on the next ute.

• Under-claimed? Get the claim in. Under-claiming is the most common and most fixable cash problem in the industry — see why profitable builders run out of cash.

• Forecast margin down two months running? Someone visits site with the cost report open.

• Forecast margin up? Find out why before you celebrate. Margin that improves usually means scope has come out, and scope that comes out quietly tends to come back loudly at practical completion.

Why don't builders do this?

Three reasons, and none of them are laziness.

The first is that the cost-to-complete requires the PM to commit to a number, and PMs are trained to be optimistic. The fix is process: make it a standing agenda item with a name against it, not a favour.

The second is that most builders' accounting file isn't set up to produce job-level costs cleanly. If your Xero tracking categories don't map to jobs, WIP is a manual archaeology exercise every month and it dies within a quarter. That's a setup problem, and it's a one-off fix.

The third is that nobody has shown them what the number is worth. On a $10M-turnover builder running a 10% margin, catching a 3-point fade on one $2M job six months early is $60,000 that stays in the business. That's the whole exercise paying for itself many times over, once.

If you want a rough sense of what live margin visibility is worth in your business, our value calculator runs the numbers in about two minutes. If you'd rather have someone build the schedule with you, that's what our project profitability service does. It sits alongside our fractional CFO service for builders who want the whole finance function handled.

FAQ

What is WIP in construction accounting?

WIP (work in progress) is the difference between the revenue you've earned on a job based on how complete it is, and the amount you've actually claimed. It shows whether you're over-claimed (holding the client's money) or under-claimed (funding the client), and reveals a job's true margin while the job is still running.

How often should a builder run a WIP report?

Monthly at minimum, refreshed at every progress claim. Annual WIP schedules satisfy your accountant but arrive far too late to change anything. Monthly WIP catches margin erosion while you can still act on it.

How do you calculate percentage complete on a construction job?

Divide costs to date by total forecast cost. The critical input is the forecast cost — the cost to complete has to be re-estimated each month by someone with eyes on the job, not carried forward from the original budget.

What's the difference between over-claimed and under-claimed?

Over-claimed means you've billed more than you've earned — the cash in your account belongs to future work. Under-claimed means you've done work you haven't billed — real profit that hasn't turned into cash yet. Over-claiming hides a cash problem; under-claiming creates one.

Know which projects are making money — while they're still running. We build the WIP schedule, sit in the monthly review, and make sure the numbers get used. Book a free strategy session and we'll look at one of your live jobs together, or call 1300 886 347.