Construction work in progress definition
/What is Construction Work in Progress?
Construction work in progress is a general ledger account in which the costs to construct a fixed asset are recorded. This can be one of the largest fixed asset accounts, given the amount of expenditures typically associated with constructed assets. The account has a natural debit balance, and is reported within the property, plant and equipment line item on the balance sheet.
Accounting for Construction Work in Progress
Once an asset is placed in service, all costs associated with it that are stored in the construction work in progress account are shifted into whichever fixed asset account is most appropriate for the asset. The most common fixed asset account to which these costs are shifted is Buildings, since most construction projects relate to that fixed asset. However, the account is also sometimes used for machinery, and as such would store the costs associated with buying, transporting, installing, and testing machinery.
While costs are being accumulated in the construction work in progress account, do not commence depreciating the asset, because it has not yet been placed in service. Once the asset is placed in service and shifted to its final fixed asset account, begin depreciating it. Thus, construction work in progress is one of only two fixed asset accounts that are not depreciated - the other one being the land account.
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The Construction Work-in-Progress Schedule
A useful tool for keeping track of the percentage of completion is the work-in-progress schedule. It tracks a project’s ongoing profitability by monitoring three measurements, which are as follows:
The percentage of completion
The amount of revenue earned to date
The amount of any over/under billings
The schedule is useful for revealing negative trends early in a project, before they can blow up into larger issues. It also shows the extent to which a project has been either overbilled or underbilled, by calculating the difference between actual billings and recognized revenues. It is overbilled when the total revenue billed to the client to date is greater than the earned amount of revenue, while it is underbilled when the earned amount of revenue to date is greater than the billed revenue. It is fairly common for projects to be overbilled, because many contracts stipulate that the client pay a significant amount at the beginning of a project. Conversely, underbilling can occur for a variety of reasons, including the following:
Costs incurred for work that is not billable
Incorrect cost estimation
Unapproved change orders
An example of a work-in-progress schedule appears in the next exhibit. In the exhibit, earned revenue is calculated as the total estimated revenue for a project, multiplied by the percentage complete. This number is compared to total billings to date to arrive at the over/(under) billing for a project.
Auditing of the Construction Work in Progress Account
The construction work in progress account is a prime target of auditors, since costs may be stored here longer than they should be, thereby avoiding depreciation until a later period. If so, reported profits are higher than should be the case.