A work-in-progress schedule is one of the central financial-management tools for a contractor with long-term jobs. It connects job-cost information, estimated cost to complete, earned revenue, billings, and expected gross profit in one schedule.
This article walks through what the schedule contains, the arithmetic behind each derived column, and a hypothetical example showing how a change in estimated cost moves the numbers.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. This article is general information and not advice about a specific contract or set of financial statements.
What the schedule is for
A WIP schedule reconciles what has been earned on each open contract against what has been billed. Those two things move independently, and the gap between them is where a contractor’s cash and reported profit both live.
For a construction performance obligation that meets ASC 606’s criteria for recognition over time, revenue is recognized by measuring progress toward complete satisfaction of that performance obligation. Depending on the facts, an input or output method may be appropriate.[1] Billing follows the contract’s payment terms. The schedule is where the two are brought together, job by job.
The columns
Provided by the contractor:
| Column | What it is |
|---|---|
| Original contract amount | The contract as signed |
| Approved change orders | Signed changes to scope and price |
| Total contract price | Original plus approved change orders |
| Estimated total cost at completion | The current best estimate of what the job will cost in total |
| Costs incurred to date | Actual job costs recorded so far |
| Estimated cost to complete | What remains to be spent |
| Billings to date | What has been billed, stated consistently as to retainage |
Derived:
| Column | Calculation |
|---|---|
| Estimated gross profit | Total contract price − estimated total cost |
| Percent complete | Costs to date ÷ estimated total cost |
| Earned revenue to date | Total contract price × percent complete |
| Gross profit earned to date | Earned revenue − costs to date |
| Overbilling | Billings to date − earned revenue, when positive |
| Underbilling | Earned revenue − billings to date, when positive |
A single job is either overbilled or underbilled, never both. On the balance sheet the two are presented separately in aggregate rather than netted across jobs.
Sureties and lenders often also want gross profit at bid alongside current estimated gross profit, retainage receivable and payable, and scheduled completion dates. See What Sureties Look At in Contractor Financial Statements.
The measurement method
The percent-complete calculation above is the cost-to-cost input method. ASC 606 requires a method that faithfully depicts performance and permits both input and output methods.[1] Cost-to-cost is a commonly used input method in construction when it faithfully depicts performance, but it is not mandated by the standard.
Two adjustments are called for when using an input method:[2]
Costs that do not depict performance are excluded. ASC 606-10-55-21(a) addresses costs incurred that do not contribute to the entity’s progress in satisfying the performance obligation — for example, significant inefficiencies or wasted materials that were not reflected in the price of the contract.
Costs not proportionate to progress are adjusted. ASC 606-10-55-21(b) addresses costs incurred that are not proportionate to the entity’s progress. The common construction case is uninstalled materials — equipment purchased and delivered but not yet installed. Where the qualifying conditions are met, the measure of progress is adjusted and revenue may be recognized equal to the cost of those transferred materials, producing zero margin on that portion.
Leaving uninstalled materials in costs-to-date without that adjustment overstates percent complete and overstates earned revenue, which can cause revenue and profit to be recognized earlier than the underlying performance supports.
A hypothetical worked example
The following is a hypothetical illustration. It is not a client engagement, it is not an actual project, and it does not represent an actual result.
A contractor has one job open.
| Total contract price | $2,400,000 |
| Estimated total cost at completion | $2,040,000 |
| Estimated gross profit | $360,000 (15.0%) |
| Costs incurred to date | $1,224,000 |
| Billings to date | $1,300,000 |
Percent complete
$1,224,000 ÷ $2,040,000 = 60.0%
Earned revenue to date
$2,400,000 × 60.0% = $1,440,000
Gross profit earned to date
$1,440,000 − $1,224,000 = $216,000
Billing position
Billings $1,300,000 − earned revenue $1,440,000 = underbilled by $140,000
The job has earned $140,000 more than it has billed. That $140,000 sits in current assets — and it is one of the items a surety commonly discounts, because it represents profit and cost recovery that has been recognized but not yet invoiced.
Now the estimate changes. The project manager re-estimates cost to complete. Estimated total cost rises by $120,000, to $2,160,000. Nothing else changes — same contract price, same costs to date, same billings.
| Before | After | |
|---|---|---|
| Estimated total cost | $2,040,000 | $2,160,000 |
| Estimated gross profit | $360,000 (15.0%) | $240,000 (10.0%) |
| Percent complete | 60.0% | 56.7% (approximately) |
| Earned revenue to date | $1,440,000 | $1,360,000 |
| Gross profit earned to date | $216,000 | $136,000 |
| Billing position | Underbilled $140,000 | Underbilled $60,000 |
A $120,000 increase in estimated cost produces an $80,000 reduction in gross profit recognized in the current period.
Two things are worth noticing.
First, percent complete went down even though no work was undone. The denominator grew, so the same costs represent a smaller share of the job.
Second, in this illustration the entire $80,000 lands in the current period, and prior periods are not restated. A change to the measure of progress is accounted for as a change in accounting estimate,[3] and a change in accounting estimate is recognized in the period of change if it affects that period only, or in the period of change and future periods when both are affected.[4] Here the revision affects the cumulative measure of progress, so the catch-up covers everything previously recognized at once. Not every estimate change in every circumstance behaves this way — the effect depends on what the revision touches.
That is why the timing of discovery matters so much. The same $120,000 estimate change, caught at 20 percent complete instead of 60, would produce a far smaller current-period adjustment. Discovered at 90 percent complete, it would be larger still.
Change orders
A contract modification is a change in the scope or price of a contract, or both, that the parties to the contract approve.[5] The modification requires approved or otherwise enforceable changed rights and obligations. Approval may be written, oral, or implied by customary business practices, and a modification can exist where the parties have approved a change in scope but have not yet determined the corresponding change in price.[6]
Performing extra work that has not been approved in any of those ways does not by itself create a contract modification. The question is whether enforceable changed rights and obligations exist, not whether the work was performed.
Most change orders on a single construction project modify an integrated scope of work rather than adding something distinct. Where that is the case, the effect is recognized on a cumulative catch-up basis at the date of the modification — the same mechanic as the example above.[7]
The situation that causes trouble is a change order where scope is approved but price is not. The change in price is then estimated as variable consideration, subject to a constraint: it is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not subsequently occur.[8]
A risk arises when an unapproved or unresolved change order is included in contract value at an amount that does not satisfy those requirements. Doing so can overstate contract value, affect the reported billing position, and create a later reversal if the amount is not ultimately supported. It is worth a conversation with your CPA about how your unapproved change orders are being treated.
Common errors
- Cost-to-complete never updated from the bid. The most common and the most damaging.
- Treating WIP as a year-end exercise rather than a monthly management document.
- Change orders added to contract value but not to the cost estimate — which manufactures profit that does not exist.
- Not reconciling WIP revenue and cost to the general ledger.
- Uninstalled materials and mobilization left in costs-to-date without the required adjustment, overstating percent complete.
- Percent complete exceeding 100 percent, or costs-to-date exceeding estimated total cost without the estimate being revised.
- Netting overbillings and underbillings across jobs on the balance sheet.
- Inconsistent retainage treatment between the contract amount, the billings column, and the balance sheet.
- Jobs parked at 95–99 percent complete for months.
- Inconsistent overhead allocation between the estimate and actual costs.
A note on terminology
ASC 606 introduced the concepts of contract asset and contract liability.[9] A contract asset is a right to consideration that is conditional on something other than the passage of time; an unconditional right is a receivable and is presented separately.
The standard does not prohibit the traditional captions. Entities may use alternative descriptions provided readers can distinguish receivables from contract assets.[10] In practice, “costs in excess of billings” and “billings in excess of costs” remain in wide use, and sureties, lenders, and contractors still say overbillings and underbillings.
Retainage. Under Topic 606, whether retainage is presented as a receivable or within contract asset or contract liability balances depends on whether the right to payment is unconditional. There is no single classification that is correct for every contractor, and practice varies. Have your CPA confirm how yours is presented.
One more distinction worth keeping straight: the WIP schedule itself is a management document. It is not a financial statement prepared under GAAP. The terminology question arises when the schedule feeds the balance sheet.
Where this connects
A WIP schedule is only as good as the job cost data underneath it. See Construction & Contractor Accounting, What Sureties Look At in Contractor Financial Statements, and Construction Profit Fade.
Where the close and the reporting need structure, that is fractional controller work; where the question is what the numbers mean for the next decision, that is fractional CFO work.
References
- ASC 606-10-55-16 through 55-20 — methods for measuring progress
- ASC 606-10-55-21 — adjustments when using an input method
- ASC 606-10-25-35 — changes to the measure of progress accounted for as a change in accounting estimate under ASC 250
- ASC 250-10-45-17 — recognition of a change in accounting estimate
- ASC 606-10-25-10 — contract modifications
- ASC 606-10-25-11 — approval and enforceability of a modification
- ASC 606-10-25-13(b) — modification accounted for on a cumulative catch-up basis
- ASC 606-10-32-5 through 32-13 — variable consideration and the constraint
- ASC 606-10-45-1 through 45-3 — contract asset and contract liability
- ASC 606-10-45-5 — alternative descriptions permitted
Corey Roder, CPA is the founder of Corey Roder, CPA PLLC. He is a licensed CPA who founded a construction company and served as its COO and CFO, managing the financial and operational decisions of that business. Earlier in his career he worked as an auditor at Grant Thornton. More about the firm: Company & People.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm.