WIP Schedules: How Auditors and Sureties Read Them

A WIP schedule is a contract-by-contract report that shows each job’s total price, costs incurred to date, estimated cost to complete, percentage complete, earned revenue, and total billings. Construction contractors prepare it because, under percentage-of-completion accounting, revenue is earned by performing work, not by sending invoices. The gap between earned revenue and billings on each contract is either an overbilling (billed more than earned, a contract liability) or an underbilling (earned more than billed, a contract asset). Sureties, lenders, and auditors read those two lines to judge cash management, estimate reliability, and the financial health of the entire backlog.

What a WIP Schedule Actually Measures

Most construction contracts require revenue recognition over time rather than at a single completion point. Under FASB Accounting Standards Codification Topic 606, a contractor satisfies its performance obligation by performing work, so revenue accrues as work progresses. Invoices, on the other hand, follow a payment schedule or monthly pay application. Those two figures rarely match in any given period, and the WIP schedule exists to capture and report that difference.

The AICPA has described the WIP schedule as potentially the single most important accounting schedule a contractor prepares. It converts day-to-day field activity into amounts that belong on the financial statements, and it provides the data points that tie the income statement to the balance sheet.

A standard WIP schedule includes, for each open contract: the total contract price, total estimated cost, costs incurred to date, estimated cost to complete, the resulting percentage complete, earned revenue to date, billings to date, and the over or underbilling on that job. The sum of all earned revenue figures should reconcile to revenue on the income statement. The aggregate overbilling and underbilling balances should tie exactly to the contract liability and contract asset totals on the balance sheet. When those reconciliations fail, something was recorded inconsistently between the field and the books, and that discrepancy needs to be resolved before any statement is finalized.

How Percentage of Completion Drives Every Line

The Cost-to-Cost Calculation

The most common measure of progress on a construction contract is the cost-to-cost method, an input method expressly permitted under ASC 606. The formula is straightforward: divide costs incurred to date by total estimated costs to arrive at a percentage complete, then apply that percentage to the contract price to calculate earned revenue.

A concrete example makes the mechanics clear. A contractor signs a $1,000,000 fixed-price contract with a total estimated cost of $800,000. By month-end, $400,000 in costs have been incurred. That is 50 percent of the estimated total, so the contract is 50 percent complete. Earned revenue is $500,000 and the estimated gross profit earned to date is $100,000.

Now layer in billings. If the contractor has invoiced the owner $560,000 through the same date, it has billed $60,000 more than it has earned. That $60,000 is an overbilling, reported as a contract liability. If instead the contractor invoiced only $450,000, earned revenue of $500,000 would exceed billings by $50,000. That $50,000 is an underbilling, reported as a contract asset. The same field conditions can produce either result depending entirely on billing behavior.

Why the Estimate to Complete Matters So Much

The reliability of every figure on the WIP schedule flows from one input: the estimate of total costs. If the estimate is wrong, the percentage complete is wrong, earned revenue is wrong, and the over or underbilling is wrong. A WIP schedule is only as accurate as the field data feeding it.

One practical issue with the cost-to-cost method is that certain costs can distort the calculated percentage if included without adjustment. Materials purchased and stored on-site but not yet installed, or large upfront mobilization costs, push the percentage complete ahead of actual physical progress. Many contractors exclude or separately account for these items so the percentage reflects work performed rather than cash spent, preventing early overstatement of earned revenue.

Overbillings: Contract Liabilities Explained

Overbillings, formally “billings in excess of costs and estimated earnings on uncompleted contracts” under legacy terminology and now reported as contract liabilities under ASC 606, appear on the balance sheet as a current obligation. The contractor has invoiced more than it has earned, meaning it owes the customer additional work to satisfy the contract.

Front-loading a billing schedule, billing for stored materials, and collecting mobilization advances all generate overbillings early in a job. Within reason this is financially healthy. Overbillings effectively finance the work and keep the contractor from funding the project out of its own working capital.

The risk is misreading what they represent. A contractor holding a large overbilling position may simply have favorable billing terms, or it may have already consumed cash that will be needed to complete work that has not yet been performed. If overbillings are what is keeping the bank balance afloat, the business faces a cash tightening as those jobs close out and billing activity slows. Sureties specifically watch for contractors who are effectively borrowing against their own backlog.

The timing distribution of overbillings across the portfolio matters as much as the total. A book of newly started jobs with front-loaded billing will naturally show a high aggregate overbilling, and that balance will unwind as the projects mature. The concern arises when overbillings stay elevated quarter after quarter while underlying work is winding down, because that pattern suggests cash is being consumed faster than new work can replenish it.

Underbillings: Contract Assets Explained

Underbillings, formally “costs and estimated earnings in excess of billings on uncompleted contracts” under legacy terminology and now reported as contract assets under ASC 606, appear as a current asset. The contractor has performed and earned revenue it has not yet invoiced.

Some underbilling is normal. Early in a project, billings often lag behind costs and earned value, and unapproved change orders frequently sit in an underbilled position until the owner executes the change. Persistent or growing underbillings are a different matter.

Large underbillings can indicate slow invoicing practices, disputed work, change orders that have been priced but not yet submitted, or, most seriously, cost overruns that have not been reflected in a revised estimate to complete. That last cause is the most consequential, because it means the contract asset on the balance sheet may actually represent a future loss that the contractor has not yet recognized.

Underbillings also strain cash. The contractor has paid for labor and materials but has not collected for them, so working capital funds the gap. A surety reviewing a contractor with a growing underbilling balance across multiple jobs will question whether the company has the liquidity to carry that position through to completion.

Separating the Causes

The appropriate response to an underbilling depends on its source, and the three main causes require three different actions.

• Timing differences. A pay application submitted a few days after month-end will show as an underbilling in the current period and resolve when the invoice is processed. No corrective action is needed beyond confirming the billing will go out.
• Unapproved change orders. These require documentation: field records, correspondence with the owner, and a realistic assessment of collectability. Change orders that are probable of approval can be included in the contract value; those in dispute should not be.
• Cost overruns. When costs are running ahead of the estimate without a corresponding revision to total estimated costs, the percentage complete is overstated and so is earned revenue. The fix is updating the estimate and, if the revised numbers show a loss contract, recognizing the full anticipated loss immediately. FASB retained the loss-provision guidance in ASC 605-35 when it issued ASC 606, so contractors continue to record the entire estimated loss in the period it becomes evident.

How Sureties and Auditors Use the WIP Schedule

What Sureties Look For

A surety underwriting bonding capacity reads the WIP schedule before almost anything else. The total over and underbilling position, compared to prior periods, signals how a contractor manages cash and whether its estimates hold up over time. A swing from a heavily underbilled to a heavily overbilled position can be reassuring or alarming depending on the underlying cause.

Profit fade is the other signal sureties hunt for. If a job’s estimated gross profit shrinks from one WIP schedule to the next, the original estimate was either optimistic or costs are running over. Repeated fade across multiple jobs undermines confidence in every estimate on the schedule, including the backlog the surety is being asked to bond. Surety underwriters have become more disciplined about this analysis in recent years as industry loss ratios have climbed.

Sureties also expect the WIP schedule to reconcile dollar-for-dollar to the balance sheet and income statement. A schedule that does not tie out tells the underwriter that the accounting system is unreliable, which affects bonding capacity directly.

What Auditors Test

For contractors with audited financial statements, the WIP schedule is a primary focus of the engagement. Auditors test the inputs that drive every derived figure: contract prices, actual costs, estimates to complete, and billings. Because estimates involve significant judgment, auditors evaluate the process used to generate them, the qualifications of the people making them, and their historical accuracy.

Auditors also look for the same red flags sureties do: contracts approaching completion with large underbillings, jobs that shifted from a healthy margin to a thin one in a single period, estimated costs that have not changed across multiple reporting periods despite obvious project risk, and billing totals that exceed the contract price. Each of those patterns triggers additional procedures.

Contractors working with an audit firm that specializes in the construction industry tend to experience less friction during this process because the auditors already understand how WIP estimates are built and what reasonable documentation looks like.

Common Red Flags on a WIP Schedule

Certain patterns draw immediate scrutiny from both auditors and sureties.

• Large underbillings late in a job. When a project is near completion, most work should already be invoiced. Underbillings at this stage usually indicate disputes, uncollected retainage problems, or cost overruns that have not been acknowledged.
• Jobs near completion with thin or negative margins. If a contract is 90 percent complete and showing little remaining profit, a loss recognition may be overdue.
• Estimated costs to complete that never change. Costs on a construction job are never static. Estimates that sit unchanged across multiple reporting periods suggest the field is not updating projections, which makes every figure derived from them unreliable.
• Billings exceeding the contract price. This usually means change orders were invoiced without being added to the contract value in the schedule, or there is a billing error that needs correction.
• Single-period margin collapses. A job that moves from a healthy projected margin to a thin or negative one in one period either absorbed a large unrecorded cost or went through a long-delayed estimate correction. Either way, documentation of the cause should accompany the revised schedule.
• Internally inconsistent percentages. A contract showing a percentage complete near or above 100 percent while still carrying significant estimated cost to complete signals a data entry error in the contract value or the cost estimate.

Reading these signals requires context. Two contractors with identical overbilling totals can be in very different financial positions depending on job mix, billing terms, and where each project sits in its lifecycle.

Related reading: Percentage-of-Completion Accounting for Contractors

Frequently Asked Questions

What is a WIP schedule in construction?

A WIP schedule, short for work-in-progress schedule, is a contract-level report that tracks each open job’s total contract price, costs incurred to date, estimated cost to complete, percentage complete, earned revenue, and billings. It is the primary tool contractors, auditors, and sureties use to assess contract profitability and financial performance across a construction portfolio.

What is the difference between overbillings and underbillings?

Overbillings occur when a contractor has invoiced more than the revenue it has earned based on percentage of completion. Under ASC 606, overbillings are reported on the balance sheet as contract liabilities. Underbillings occur when a contractor has earned more revenue than it has invoiced, and they are reported as contract assets. Both are calculated by comparing earned revenue to total billings on each individual contract.

How is percentage of completion calculated on a WIP schedule?

The most common approach is the cost-to-cost method: divide total costs incurred to date by the total estimated costs to arrive at a percentage complete, then multiply that percentage by the total contract price to determine earned revenue. ASC 606 permits this input method for performance obligations satisfied over time, which describes most construction contracts.

Why do sureties care so much about the WIP schedule?

The WIP schedule reveals cash management, estimate reliability, and profitability trends across a contractor’s entire backlog. Sureties use it to set bonding capacity and to identify profit fade, the pattern of a job’s estimated margin shrinking as work progresses, which signals weak estimating or cost control. A WIP schedule that does not reconcile to the financial statements raises underwriting concerns directly.

Are overbillings a warning sign?

Not necessarily. Moderate overbillings are a normal and often healthy result of favorable billing terms, and they help finance work without straining working capital. They become a concern when a contractor is relying on overbillings to cover operating expenses that have already been incurred, leaving a cash shortfall as jobs close out and billing activity slows.

What happens when a WIP schedule shows a loss contract?

If revised estimates show that total costs will exceed total contract revenue, the entire anticipated loss on that contract must be recognized immediately, in the period the loss becomes evident. This loss-provision requirement comes from ASC 605-35, which FASB retained when it issued ASC 606. It is one of the most significant judgments on a WIP schedule, and it is one auditors test directly by evaluating the reasonableness of the estimate to complete.