What are the Best Practices for Revenue Recognition and WIP Reporting in Construction?

For construction companies, accurate financial reporting is about more than tracking revenue and expenses. Because many construction projects span multiple months or years, contractors need reliable processes for recognizing revenue, estimating project costs, and monitoring profitability throughout the project lifecycle.

Two of the most important tools in construction accounting are revenue recognition and work-in-progress (WIP) reporting. When managed correctly, these processes provide valuable insight into project performance, cash flow needs, and overall business health. When overlooked or inaccurate, they can lead to financial statement errors, reduced bonding capacity, and unexpected project losses.

At Froehling Anderson, our construction accounting professionals work with contractors throughout Minnesota and the surrounding region to help them understand complex accounting requirements, improve financial reporting processes, and make informed business decisions.

Revenue recognition is the process of determining when and how construction companies record revenue earned from contracts. Because construction projects often extend across multiple reporting periods, contractors must recognize revenue as work is completed rather than waiting until a project is fully finished.

Under ASC 606, Revenue from Contracts with Customers, construction companies recognize revenue when they satisfy a performance obligation by transferring control of goods or services to the customer.

For many construction contracts, revenue is recognized over time, which generally aligns with the traditional percentage-of-completion method.

Construction contracts typically meet one of the following ASC 606 criteria for recognizing revenue over time:

• The customer controls the asset as it is being constructed.
• The contractor creates a specialized asset with no alternative use.
• The contractor has an enforceable right to payment for work completed to date.

Because each construction contract is different, contractors must carefully evaluate contract terms, performance obligations, change orders, and payment requirements before determining the appropriate revenue recognition method.

A work-in-progress (WIP) schedule is one of the most valuable financial reporting tools available to contractors. A WIP report provides a snapshot of where each project stands financially and helps management understand whether jobs are progressing as expected.

A typical construction WIP schedule includes:

• Contract value
• Approved change orders
• Costs incurred to date
• Estimated costs to complete
• Total estimated project costs
• Percentage of completion
• Revenue earned
• Billings to date
• Overbillings and underbillings
• Gross profit recognized

A properly prepared WIP schedule allows contractors to answer important questions:

• Are projects staying on budget?
• Are profit margins increasing or declining?
• Are cost overruns being identified early?
• Are billing schedules aligned with project progress?
• Will upcoming cash flow needs require attention?

The most successful construction companies view WIP reporting as more than an accounting requirement. They use it as a strategic management tool to guide daily decisions and long-term planning.

1. Evaluate Every Contract Under ASC 606

One of the most important steps in construction revenue recognition is reviewing each contract carefully.

Contractors should evaluate:

• Whether revenue should be recognized over time or at a point in time
• Whether multiple performance obligations exist
• How contract modifications and change orders should be treated
• Whether there is an enforceable right to payment for completed work

A consistent contract review process helps ensure revenue is recorded accurately and supported by appropriate documentation.

2. Maintain Accurate Cost-to-Complete Estimates

Construction profitability depends heavily on accurate forecasting. For contractors using a cost-to-cost approach, revenue recognition is directly impacted by estimates of remaining project costs.

Contractors should regularly evaluate:

• Labor costs
• Material costs
• Subcontractor expenses
• Equipment costs
• Project risks and contingencies

Even small changes in cost estimates can significantly affect recognized revenue and gross profit. Updating project forecasts throughout the year, rather than waiting until year-end, helps identify issues earlier and improves decision-making.

3. Establish Strong Change Order Procedures

Change orders are one of the most common areas where construction companies experience revenue recognition challenges.

A strong change order process should include:

• Written documentation
• Approval tracking
• Separate cost coding
• Ongoing review of collectability
• Evaluation of variable consideration

Unapproved change orders and claims require careful analysis before they are included in revenue calculations. Without proper documentation, contractors may unintentionally overstate revenue or project profitability.

4. Document Revenue Recognition Decisions

ASC 606 requires contractors to maintain strong documentation supporting significant accounting judgments.

Documentation should support:

• Performance obligation conclusions
• Progress measurement methods
• Change order treatment
• Variable consideration estimates
• Management judgments affecting revenue recognition

Strong documentation not only improves internal processes but also helps create a smoother audit experience.

1. Use the WIP Schedule as a Management Tool

Many contractors only think about WIP schedules during year-end financial reporting. However, companies that use WIP reporting throughout the year gain a clearer understanding of project performance.

Regular WIP analysis helps management:

• Identify cost overruns
• Detect margin fade
• Monitor profitability
• Forecast cash flow needs
• Make proactive operational decisions

A timely and accurate WIP schedule provides leadership with the information needed to address problems before they become larger issues.

2. Review WIP Reports Monthly

Monthly WIP reporting is considered a best practice for construction companies.

Frequent reviews allow contractors to:

• Identify project issues earlier
• Improve forecasting accuracy
• Monitor project profitability
• Identify billing concerns
• Adjust project strategies when needed

Waiting until year-end can make it more difficult to correct project issues that have developed over time.

3. Monitor Overbillings and Underbillings

Regular review of overbillings and underbillings can provide management valuable insight into project cash flow and profitability trends.

Underbillings may indicate:

• Delayed invoicing
• Unapproved change orders
• Cash flow concerns
• Revenue recognized ahead of billing

Overbillings may indicate:

• Strong collections
• Front-loaded billing schedules
• Future project obligations

Significant variances between earned revenue and customer billings should always be reviewed to determine whether they represent operational problems or normal project timing differences.

4. Reconcile WIP Reports to the General Ledger

A WIP schedule should always tie back to the company’s accounting records.

Regular reconciliation should include:

• Job costs
• Revenue recognized
• Customer billings
• Contract assets
• Contract liabilities

Keeping WIP schedules aligned with the general ledger improves financial statement accuracy and reduces surprises during year-end reporting.

5. Include Approved Change Orders Promptly

Approved change orders should be incorporated into WIP schedules as soon as possible.

Failing to update contract values can result in:

• Incorrect percentage-of-completion calculations
• Margin distortions
• Revenue recognition errors

Construction companies should ensure contract values and estimated costs always reflect current project conditions.

6. Hold Regular WIP Review Meetings

Leading construction companies often conduct monthly WIP meetings with key stakeholders, including:

• Accounting teams
• Project managers
• Operations leaders
• Executive management

These discussions should focus on:

• Cost overruns
• Estimated completion costs
• Margin changes
• Pending change orders
• Aging underbillings

Collaborative WIP reviews improve accountability and help management make better decisions.

Most construction companies benefit from reviewing WIP schedules monthly. Regular updates provide more accurate project information and allow management to respond quickly to cost changes, delays, or profitability concerns.

Poor WIP reporting can lead to inaccurate financial statements, unexpected profit adjustments, cash flow challenges, and potential concerns from lenders, bonding companies, or sureties.

ASC 606 places greater emphasis on contract analysis, documentation, estimates, and disclosures. While many construction companies continue recognizing revenue over time, they must carefully evaluate contracts and maintain support for their accounting conclusions.

Construction companies face unique accounting challenges that can directly impact profitability, cash flow, and bonding capacity. Accurate revenue recognition and reliable WIP reporting provide the foundation for understanding project performance and making confident business decisions.

At Froehling Anderson, we work closely with construction businesses to:

• Navigate ASC 606 revenue recognition requirements
• Improve WIP reporting processes
• Evaluate project profitability
• Identify potential issues early
• Strengthen financial reporting accuracy
• Provide insight that supports long-term growth

Our team understands that construction accounting requires more than historical reporting; it requires a proactive approach focused on helping contractors understand where their business stands today and where it is headed tomorrow. If you’re looking for a partner to provide accounting expertise and strategic guidance in navigating today’s complex financial environment, our team is ready to help you!

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your plan advisor or CPA for guidance tailored to your situation.