What You'll Learn
- Why invoiced amounts and job profitability aren't the same thing
- How job costing and the percentage-of-completion method actually work
- What "overbilling" and "underbilling" mean, and why they matter
- A worked hypothetical WIP schedule, explained line by line
- Common WIP mistakes and what to check first
Why Invoiced Amounts Don't Tell the Whole Story
Most construction billing follows a schedule of values or draw schedule — not the actual pace of the work. That means it's entirely possible to bill ahead of progress (overbilling) or fall behind on billing even though the work is moving along fine (underbilling). Neither shows up if you're only looking at invoices and bank balance.
Job costing is the practice of tracking every cost — labor, materials, subcontractors, equipment — against the specific job that incurred it, instead of lumping everything into one general ledger. It's the foundation everything else in this article depends on.
What a WIP Schedule Actually Shows
A work-in-progress (WIP) schedule applies job costing data using the percentage-of-completion method — the standard approach for measuring progress on long-term contracts, used both for financial reporting under ASC 606 and, in many cases, for tax purposes under IRC Section 460. The mechanics are two steps:
- Percent complete = Costs incurred to date ÷ Total estimated cost at completion
- Earned revenue = Percent complete × Total contract value
Comparing earned revenue to what's actually been billed tells you whether a job is overbilled or underbilled:
- Overbilling — you've invoiced more than you've earned based on progress. This is a liability, typically labeled "billings in excess of costs and estimated earnings": cash you've collected but haven't actually earned yet.
- Underbilling — you've earned more than you've invoiced. This is an asset, typically labeled "costs and estimated earnings in excess of billings": work you've already done but haven't billed for yet.
Methodology source: PeaseBell CPAs — Reading a WIP Schedule: Over and Under Billings Explained
Practical Tip
Materials delivered to a site but not yet installed are often excluded from the costs-incurred figure used in the percent-complete calculation, since including them can inflate the percentage without reflecting real progress on the work itself — though exact treatment depends on the specific method and contract terms your accountant uses. Check with your accountant on how your WIP schedule handles this.
A Worked Example
Hypothetical example — for illustration onlyThe job below is fictional, built only to show how the numbers connect. It is not a real AmpleX Consultants client or engagement, and no actual AmpleX work is described anywhere in this example.
Accounting Method Assumed
This example assumes a contract using the percentage-of-completion method to measure progress — the most common approach. It's for illustration only; your actual method, and the detail of the calculation, should be confirmed with your tax preparer.
Assumptions Used in This Example
A single job with a $400,000 contract value. $220,000 in costs have been incurred to date. The estimated total cost at completion is $320,000. $260,000 has been billed to the client so far.
| Line item | Value | How it's calculated |
|---|---|---|
| Contract value | $400,000 | — |
| Costs incurred to date | $220,000 | Direct job costs tracked so far |
| Estimated cost at completion | $320,000 | Costs to date + estimated remaining costs |
| Percent complete | 68.75% | $220,000 ÷ $320,000 |
| Earned revenue | $275,000 | 68.75% × $400,000 |
| Billed to date | $260,000 | Actual invoices sent |
| Underbilling | $15,000 | Earned revenue − billed to date |
In this hypothetical, the job is slightly underbilled by $15,000 — the crew has earned more than has been invoiced. That's not necessarily a problem, but it means $15,000 of completed work hasn't been billed yet, which affects cash flow until the next draw goes out.
Common Mistakes
- Not tracking costs by job — without job-level costing, there's no way to calculate percent complete at all.
- Ignoring committed costs — purchase orders and subcontracts that haven't been invoiced yet still belong in the estimated cost at completion.
- Letting estimates go stale — if the estimated cost at completion isn't updated as a job progresses, percent complete becomes inaccurate.
- No WIP schedule at all — relying on bank balance or invoiced totals to judge a job's health, which hides over- and underbilling entirely.
Next Steps
- Confirm every cost is being coded to a specific job, not a general expense account
- Review and update estimated-cost-to-complete figures at least monthly
- Build a WIP schedule covering all active jobs, not just the ones that feel behind
- Check each job's over/underbilling position before assuming cash in the bank equals profit
Where This Connects to Your Books
A WIP schedule is only as accurate as the job costing underneath it. If labor, materials, and subcontractor costs aren't being tracked by job in the first place, there's no reliable percent-complete figure to build from.
Where AmpleX Consultants Can Help
AmpleX Consultants sets up construction bookkeeping and job costing so every cost lands on the right job, and builds the WIP reporting that shows which jobs are actually ahead or behind. For ongoing forecasting built around how contractors get paid, see construction fractional CFO services.