How should contractors use Work in Progress reporting to monitor project profitability?

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At its core, Work in Progress construction reporting compares contract value, costs incurred, estimated costs to complete, billings, and expected gross profit. When maintained consistently, it helps contractors see whether a project is performing as bid, gaining margin, or quietly losing money.

Start with Percentage Complete

Most construction WIP reporting begins with the Percentage of Completion method. A contractor typically calculates percentage complete by dividing costs incurred to date by total estimated project costs. That percentage is then applied to the contract amount to determine how much revenue has been earned to date.

For example, if a $1 million project has estimated costs of $800,000 and $400,000 of costs have been incurred, the job is 50% complete. Under that calculation, the contractor has earned $500,000 of revenue. If only $350,000 has been billed, the project may be underbilled. If $650,000 has been billed, it may be overbilled.

Neither condition is automatically bad, but both deserve attention. Underbillings may signal missed billing opportunities, delayed change order approval, or poor cash flow management. Overbillings may improve cash flow temporarily, but they can also create pressure later if the remaining work costs more than expected.

Watch estimated cost to complete

The most important number in a WIP report is often not the cost incurred to date. It is the estimate of what remains.

A job can look profitable early simply because the original budget has not been updated. That is where contractors get surprised. Materials rise, labor productivity slips, scope grows, equipment runs longer than expected, and suddenly the margin that looked healthy on paper starts fading.

A useful WIP schedule construction process should force regular review of estimated costs to complete. Project managers and accounting teams should not treat the estimate as a static number from the bid file. It should reflect current field conditions, approved change orders, pending change orders, known delays, subcontractor issues, and remaining labor needs.

This is where good construction accounting becomes operational, not just financial. The report is not asking, “What did we spend?” It is asking, “Based on what we know now, what will this job really cost?”

Use WIP to identify profit fade

Profit fade occurs when projected profit margin declines as the project progresses. A job may start with a 15% expected margin and later fall to 10%, 6%, or worse. The earlier leadership sees that movement, the more options they have.

A strong WIP report construction process helps contractors spot fade by comparing original estimated profit, current projected profit, and actual performance to date. When margin declines, management can ask practical questions: Was the original estimate too aggressive? Are labor hours exceeding budget? Were change orders missed? Is the project manager updating the forecast? Is the customer slow to approve added scope?

The point is not to punish the team. The point is to catch the story while it can still be changed. Year-end is a terrible time to discover a job has been bleeding margin since April.

Connect billing and cash flow

A WIP report also helps contractors separate revenue earned from amounts billed. That is especially important because billing and profitability are related, but they are not the same thing.

A contractor may have strong cash flow because it billed ahead of earned revenue. Another may be profitable on paper but cash-poor because billings trail completed work. Both situations matter to leadership, lenders, bonding companies, and outside advisors.

Good construction WIP accounting gives contractors a clearer view of overbillings, underbillings, receivables, and whether completed work is converting into cash. Large receivables on finished or nearly finished jobs deserve special attention because they may point to disputes, documentation problems, or collection risk.

Keep revenue recognition in view

WIP reporting should also support financial reporting under applicable revenue recognition rules. For many contractors, that means understanding how project estimates, contract modifications, variable consideration, and performance obligations affect revenue under ASC 606.

This is one reason WIP reporting should not live only with accounting or only with operations. It works best when project managers, finance leaders, and executives review it together.

Why outside stakeholders care

Banks, sureties, CPAs, auditors, and investors use WIP reporting to evaluate financial health, backlog quality, and the contractor’s ability to complete work profitably. In a Private Equity context, WIP reporting can also influence diligence, valuation, and confidence in reported earnings.

A practical answer

For contractors reviewing common Construction Accounting Questions, WIP reporting should be treated as a monthly profitability discipline. Update it regularly. Challenge cost-to-complete assumptions. Reconcile billings to earned revenue. Investigate profit fade. Review change orders. Look closely at receivables.

A WIP report is not just a spreadsheet. Used well, it is the early warning system for project profitability. And in construction, early warnings are much cheaper than late surprises.

How BT Can Help

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 Aaron Scale, partner in charge of Bennett Thrasher’s Construction practice, or call us at 770.396.2200.

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