What Is Work-in-Progress (WIP)?
Work-in-progress is a balance sheet concept that represents the value of work a contractor has completed but not yet invoiced. It sits between the moment work is performed and the moment an invoice is sent. In accounting terms, WIP is an asset because the business has earned the revenue even though it has not yet collected it. For service contractors doing short jobs, WIP is typically minimal. For contractors managing large multi-phase projects, WIP can represent significant sums of unbilled revenue.
- Percentage Complete: the estimated proportion of the project completed at the time of calculation
- Contract Value: the total agreed project price
- Amount Billed to Date: all invoices issued against this project so far
Why It Matters to Contractors
WIP tracking helps contractors understand the true financial position of their business at any point in time. A business can look active and fully scheduled while actually carrying significant unbilled work, which means cash has not yet come in. Without tracking WIP, contractors can be surprised by the gap between how busy they feel and what their bank account shows.
How It Works
WIP is calculated by comparing the value of work completed to the amount that has been invoiced so far. If you have completed more work than you have billed, you are in an underbilled position and carry positive WIP. If you have billed more than you have completed, you are in an overbilled position. Overbilling creates a liability on the balance sheet because the client has paid for work that has not yet been done.
A painting contractor is 60% through a $50,000 commercial project. They have invoiced $20,000 so far. WIP = (0.60 x $50,000) - $20,000 = $30,000 - $20,000 = $10,000. The business has earned $10,000 in revenue that it has not yet invoiced. If the contractor has three projects in similar positions at the same time, total unbilled WIP could be $30,000 or more.
Work-in-Progress vs. Accounts Receivable
Accounts receivable represents invoices already sent to clients that have not yet been paid. Work-in-progress represents work completed that has not yet been invoiced. Both are assets, but they represent different stages of the revenue cycle. A contractor managing large projects needs to track both: WIP to know when to bill, and accounts receivable to know which bills have been sent but not collected.
How Contractors Track This
WIP is tracked through project management or job costing software that compares budgeted costs, actual costs incurred, and invoices issued. For contractors on percentage-of-completion billing, this calculation is updated each time a progress invoice is issued. Reviewing WIP reports regularly prevents the common problem of forgetting to bill for completed phases of a project.
Frequently Asked Questions
Is work-in-progress an asset or a liability?
WIP is typically recorded as an asset on the balance sheet when the contractor is underbilled (has completed more work than has been invoiced). It becomes a liability when the contractor is overbilled (has invoiced more than has been completed). Most contractors aim to stay in a neutral or slightly underbilled position to avoid having to return money if a project does not reach the billed milestone.
What is the difference between overbilling and underbilling in construction?
Underbilling occurs when a contractor has completed more work than they have invoiced. They are owed money they have not yet asked for. Overbilling occurs when a contractor has invoiced more than they have completed. They have received money for work they have not yet done. Both situations carry risk. Underbilling hurts cash flow. Overbilling creates a liability and, if the project is not completed, may require refunds.
Do service contractors need to track WIP?
Most residential service contractors doing single-visit jobs do not need formal WIP tracking. If a technician completes a service call and the invoice goes out the same day, there is no meaningful WIP balance. WIP tracking becomes important for contractors who do large installations, commercial projects, or any work that spans multiple weeks and where invoicing lags behind work completion.