How to Calculate WIP in Construction: The Formula and What It Means

DEFINITION

percent complete

Actual cost to date divided by total estimated cost — the completion fraction used in percentage-of-completion accounting. A job with $90,000 in actual costs against a $150,000 estimate is 60% complete.

DEFINITION

earned revenue

Percent complete multiplied by contract value — the revenue your business has actually earned, regardless of what you've billed. On a $200,000 contract that is 60% complete, earned revenue is $120,000.

DEFINITION

under-billing

Earned revenue exceeds billings to date — you've done work you haven't invoiced yet. Shows as a current asset on the balance sheet (costs in excess of billings). Under-billing is a warning sign: you're financing the GC's project with your own working capital.

DEFINITION

over-billing

Billings to date exceed earned revenue — you've billed more than you've earned. Shows as a current liability (billings in excess of costs). Moderate over-billing is a normal result of front-loaded billing schedules; chronic over-billing on shrinking jobs signals margin erosion.

The WIP Formula with a Worked Example

The percentage-of-completion method uses three numbers for each job: actual cost to date, total estimated cost, and contract value.

Here is a concrete example using round numbers.

Job 2041 is a commercial electrical fit-out. Contract value: $200,000. Total estimated cost: $150,000. Actual cost to date: $90,000. Billings to date: $95,000.

Step one: percent complete = $90,000 divided by $150,000 = 60%.

Step two: earned revenue = 60% times $200,000 = $120,000.

Step three: over/under billing = $120,000 earned revenue minus $95,000 billed = negative $25,000. You are under-billed by $25,000.

Now run this for every open job on your schedule. Add up all the under-billings. Add up all the over-billings. Those two totals go on your balance sheet this month.

The inputs sound simple. The difficulty is having reliable cost data by job. If your actual costs are not tracked to the job level — if they are sitting in QuickBooks without job codes, or split across multiple spreadsheets — the calculation is only as good as your estimates. Garbage in, garbage out.

What Under-Billing and Over-Billing Mean on Your Balance Sheet

Under-billings are current assets. The label is “costs and estimated earnings in excess of billings.” They represent real value — work performed that you have not yet invoiced. But they are not cash, and they are not guaranteed. If a job goes sideways before you bill, the asset disappears.

Over-billings are current liabilities. The label is “billings in excess of costs.” They represent cash you have collected that you have not yet earned. If a project cancels before you complete the work, you may owe that money back.

A business with large over-billings looks profitable on a cash basis but is carrying a hidden liability. A business with large under-billings looks cash-poor but has real value sitting in unbilled work.

Your working capital ratio — current assets divided by current liabilities — changes significantly depending on which direction your WIP runs. Bonding companies and banks look at this number. A large under-billing position increases your current assets and improves your working capital ratio. A large over-billing position does the opposite.

When the Bonding Company Asks for Your WIP

Surety bonding companies ask for a WIP schedule at every bond renewal and often at mid-year for larger accounts. What they are looking for: evidence that your revenue recognition matches your actual job progress, that your over-billings are not masking shrinking margins on late-stage jobs, and that your under-billings are real (not inflated by cost overruns you haven’t recognized yet).

A job that is 90% complete by cost but only 70% billed looks like a clean under-billing on paper. If the remaining 10% of work will cost twice the estimate, the job is actually over-budget and the “earned revenue” calculation overstates your position. Bonding underwriters know how to spot this — they will ask about your cost-to-complete estimates for any job where the math looks unusual.

Keep your WIP schedule honest. An inflated WIP that gets you a bigger bond line this year creates a worse problem next year when the jobs close at lower margins than projected.