Construction in Progress is an asset account used to accumulate costs for a long-lived asset before it is ready for use. In Construction in Progress accounting, costs are not expensed immediately. They are held in CIP until the project is substantially complete, then transferred to the appropriate fixed asset account.
CIP can apply to buildings, warehouses, manufacturing plants, IT infrastructure, equipment installations and other assets being built for future use. The main idea is matching. If a project creates an asset that will benefit the company over many years, the related costs should generally be capitalized and depreciated over the asset’s useful life after it is placed in service.
A CIP account generally includes costs directly tied to bringing the asset to its intended condition and location. These may include materials, direct labor, contractor costs, engineering fees, architectural fees, permits, site preparation, equipment installation, testing and eligible interest during the construction period.
For example, assume a company spends $900,000 on a construction project on February 1, another $700,000 on June 1 and another $500,000 on November 1. The weighted average accumulated expenditures would be calculated based on how long each amount was outstanding during the year:
$900,000 × 11/12 = $825,000
$700,000 × 7/12 = $408,333
$500,000 × 2/12 = $83,333
Total weighted average accumulated expenditures = $1,316,666
If the applicable borrowing rate is 6%, capitalized interest would be:
$1,316,666 × 6% = $79,000
That $79,000 would be added to CIP and included in the asset’s historical cost, rather than recorded as current period interest expense.
Costs that typically should not be capitalized include general administrative overhead, training, abnormal waste, relocation costs and post completion costs. Bonus Depreciation may become relevant later, but CIP itself is not depreciated while the asset remains under construction.
CIP is reported as a non-current asset, usually within property, plant and equipment (PP&E). A Construction in Progress balance sheet line is shown at cost, with no accumulated depreciation attached to it. Depreciation does not begin until the asset is completed and ready for use. If the CIP balance is significant, the company may also include footnote disclosures describing the related projects, expected timing and estimated total cost.
A CIP asset transfers to fixed assets when it is substantially complete and ready for its intended use. This does not always mean the asset is already being used. If a warehouse has received its certificate of occupancy and is ready for operations, it may need to be moved from CIP to buildings even if inventory has not yet been moved in.
Once transferred, depreciation begins based on the asset’s depreciable cost and useful life. For example, if a completed commercial building is placed in service at a cost of $3,120,000 and depreciated over 39 years using the straight line method, annual depreciation would be:
$3,120,000 ÷ 39 years = $80,000 per year
The entry would debit Depreciation Expense and credit Accumulated Depreciation for $80,000 annually.
The One Big Beautiful Bill Act may affect broader tax planning discussions for capital assets, but the accounting trigger for moving CIP to fixed assets remains readiness for intended use.
CIP accounting and WIP reporting are often confused, especially in construction. CIP tracks costs for assets a company is building for its own long-term use. Construction work in progress often refers to contractor project accounting, where a WIP report tracks job costs, percentage complete, earned revenue, billings, overbillings and underbillings.
Two WIP examples: In an overbilling scenario, a project has $0 costs to date, $0 earned revenue and $500,000 billed, creating $500,000 of overbilling. In an underbilling scenario, $465,000 of costs on a $930,000 estimated cost project equals 50% completion. On a $1 million contract, that produces $500,000 of earned revenue with $0 billed, creating $500,000 of underbilling.
Accounting Questions to Ask when Starting a Construction Company should include whether the business is tracking company owned assets through CIP separately from customer project WIP.
Is Construction in Progress considered a depreciable asset?
No. CIP is not depreciated while the asset is still under construction. Depreciation begins only after the asset is substantially complete, ready for its intended use and reclassified from CIP into the appropriate fixed asset account.
What types of costs qualify for capitalization in a CIP account?
Capitalized CIP costs generally include direct materials, direct labor, contractor charges, permits, design fees, engineering fees, site preparation, equipment installation, testing and eligible construction period interest. The cost should be directly tied to preparing the asset for use.
How does CIP accounting affect a company’s tax position?
CIP can affect timing because costs are capitalized rather than deducted immediately. Depreciation generally begins after the asset is placed in service, so delayed reclassification or poor project tracking can distort book records and tax planning.
What happens to the CIP account when a project is abandoned?
If a project is abandoned, the company should evaluate whether the CIP balance is impaired. Costs that no longer provide future economic benefit may need to be written off through an impairment loss or other appropriate accounting entry.
How often should CIP balances be reconciled against project status?
CIP balances should generally be reviewed monthly or quarterly. Regular reconciliation helps confirm that costs are properly classified, completed assets are transferred timely, capitalized interest is calculated correctly and abandoned or delayed projects are evaluated for impairment.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Mike Reynolds, partner in charge of Bennett Thrasher’s Financial Reporting & Assurance practice, who has industry experience in Construction, or call us at 770.396.2200.
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