Key Takeaway: Start by identifying whose books you are reconciling. A contractor’s WIP schedule connects job costs, progress, revenue and customer billing. An owner constructing a rental property tracks qualifying construction costs, unpaid obligations and funding. Loan proceeds, customer billings, revenue and cash collections belong in distinct records.
This article is part of our guide to construction and contractor accounting.
A construction project can be on budget and still need cash, or show cash in the bank while its expected profit is falling. A useful month-end reconciliation explains these differences. It connects the project manager’s estimate with the general ledger, supporting documents and funding schedule without forcing unlike amounts to match.
Separate Contractor WIP from Owner Construction Costs
Contractor WIP is a project reporting schedule; the label does not mean that all costs on unfinished jobs remain capitalized until completion. Costs may be recognized as expenses as performance occurs, while particular inventory or contract costs may qualify as assets under the applicable accounting rules.
An owner building a property for its own rental business has a different objective: accumulating qualifying costs of the asset being constructed. A contractor’s percentage complete does not create construction revenue for that owner. Identify the legal entity, reporting framework, project and accounting period at the top of each schedule.
| Question | Contractor performing customer work | Owner constructing a rental property |
|---|---|---|
| What does the cost schedule support? | Job costs, estimated remaining work and contract profitability | Construction asset costs, expenses where appropriate, and budget control |
| What does the price or budget mean? | Customer consideration evaluated under the contract and revenue policy | Expected project spending; it is not an earned-revenue amount |
| Where does funding appear? | Customer receivables, collections and contract balances; borrowing separately | Loan balances, documented owner equity or owner loans, and cash |
Construction Contractor Job Costing Records is covered in more depth in our related article, “Job Costing and Tax Records for Construction Contractors.”
Build a Document Map That Preserves the Differences
Assign each transaction to the correct entity, project, phase and account. A document can support several accounting lines: an invoice may create both a project cost and a payable. Link those entries to the same document instead of entering the invoice and its payment as two costs.
| Document or event | What to investigate | Reconciliation treatment |
|---|---|---|
| Vendor work received; invoice unpaid | Service period, approved amount and cost classification | Record the appropriate cost or asset and payable under the reporting basis; include supported cutoff accruals |
| Purchase order for future work | Unperformed commitment and cancellation terms | Track the remaining commitment in the forecast; do not count it automatically as work already incurred |
| Vendor deposit or payment | Whether work was received and a payable already exists | Clear the payable or record the appropriate prepayment; investigate unmatched payments |
| Contractor customer billing | Enforceable payment rights and performance to date | Reconcile receivables and the contract balance separately from recognized revenue |
| Owner’s lender draw | Requested, approved and actually advanced amounts; direct payments and fees | Reconcile the actual advance to debt and its documented use, rather than to customer billings |
| Owner transfer | Source, entity and loan or contribution documentation | Classify as equity or an owner loan as supported; do not assume every transfer is revenue or equity |
| Retainage | Whose books, payment conditions and release terms | Separate an owner’s retained payable from a contractor’s receivable or conditional contract balance |
A draw can differ from current-period costs because it reimburses earlier spending, excludes ineligible items or leaves cash for later use. Record the explanation and reconcile each balance to its own supporting schedule. Investigate unsupported invoices promptly and follow the contract and applicable payment law when resolving disputes.
Determine the Contractor’s Revenue Method Before Using a Formula
For U.S. GAAP reporting, ASC 606 requires an assessment of the performance obligation. Recognition over time is appropriate when a qualifying criterion is met—for example, the customer controls the asset as it is created or enhanced. Otherwise, evaluate recognition when control transfers at a point in time. Billing frequency does not decide the result. See FASB’s ASC 606 guidance, paragraphs 25-27 through 25-30.
For an obligation recognized over time, cost-to-cost is one possible progress measure. Choose a measure that faithfully depicts performance, and apply it consistently to similar obligations in similar circumstances. Exclude the effect of unexpected waste that does not depict progress, and assess whether significant uninstalled materials require an adjustment. A future purchase commitment is not an incurred input. FASB’s discussion of progress measures reproduces ASC 606-10-55-20 and 55-21.
Comparable dollar amounts can be totaled across appropriately prepared schedules even when different obligations use different valid methods. Do not average project completion percentages without a meaningful weighting basis.
Update Price and Cost Estimates Independently
A price-only change and an unrecovered cost increase can both be legitimate. Reforecast incurred costs plus remaining costs without counting commitments twice. Include known cost exposure while separately assessing whether a related claim belongs in revenue.
Contract modifications can be approved in writing, orally or through customary practices if they create enforceable rights. Approved scope with an unsettled price requires a variable-consideration assessment, including a conclusion that it is probable a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. The accounting for a modification depends on whether the remaining goods or services are distinct. See FASB’s summary of the contract-modification requirements.
A Contractor Reconciliation with Numbers
This hypothetical example assumes one construction obligation qualifies for recognition over time because the customer controls the asset as it is built. Cost-to-cost faithfully measures performance, all illustrated costs qualify as progress inputs and are expensed as performance occurs, and there are no retainage, advance-payment, credit-loss or variable-price complications.
| Cumulative project measure | Calculation | Amount |
|---|---|---|
| Contract consideration | Fixed agreed price | $500,000 |
| Total estimated cost | $160,000 incurred + $240,000 remaining | $400,000 |
| Progress | $160,000 ÷ $400,000 | 40% |
| Revenue recognized to date | 40% × $500,000 | $200,000 |
| Gross profit recognized to date | $200,000 − $160,000 | $40,000 |
| Customer billings with unconditional payment rights | Billing register | $180,000 |
| Customer cash collected | Cash receipts register | $150,000 |
| Unpaid unconditional receivable | $180,000 − $150,000 | $30,000 |
| Contract asset | $200,000 earned − $180,000 billed, with the remaining right conditional on further performance | $20,000 |
The $150,000 collected is neither revenue of $200,000 nor profit of $40,000. Expected total project gross profit is $100,000, before overhead outside the illustrated job costs. When recording the current month, subtract amounts already recognized from the required cumulative totals.
Classify balances using payment rights, not the presence of an invoice alone. An unconditional right is a receivable even if an invoice has not been issued; a right requiring more than passage of time is a contract asset. A contract liability reflects performance still owed for consideration received or due. Present the contract asset or liability net for each contract, with unconditional receivables separately. See ASC 606-10-45-1 through 45-4.
An Owner’s Construction-in-Progress Reconciliation
Consider a separate hypothetical rental-property project with no opening balances. Assume all $260,000 of costs incurred qualify for capitalization under the owner’s reporting framework. The owner has paid $220,000, received $200,000 in loan advances and contributed $100,000 of documented equity. There are no other transactions.
| Balance | Calculation | Amount |
|---|---|---|
| Construction asset | Qualifying incurred costs | $260,000 |
| Cash | $200,000 loan + $100,000 equity − $220,000 paid | $80,000 |
| Unpaid construction costs | $260,000 incurred − $220,000 paid | $40,000 |
| Loan principal | Actual advances; no principal repaid | $200,000 |
| Owner equity | Documented contribution | $100,000 |
The balance sheet reconciles: $340,000 of assets equals $240,000 of liabilities plus $100,000 of equity. There is no $260,000 construction-revenue entry in the owner’s books. Paying the remaining $40,000 clears the payable and reduces cash; it does not add the same construction cost a second time.
For tax basis, IRS Publication 551, “Constructing assets” and “Uniform Capitalization Rules,” explains construction costs and capitalization requirements. Keep land separate, evaluate direct and indirect costs, and distinguish asset costs from financing costs. An exception to section 263A does not make every cost of constructing an asset immediately deductible. For rental property, depreciation generally begins when the property is ready and available for its intended rental use, as explained in IRS Publication 527.
Keep Financial Reporting and Tax Methods Separate
A management WIP formula does not select the federal tax method. Under Internal Revenue Code section 460, a construction contract can be long-term because it crosses the tax-year end, even if it lasts less than twelve months. The percentage-of-completion requirement has exceptions. The expanded residential-construction exception applies to contracts entered into in tax years beginning after July 4, 2025.
Other qualifying construction contracts generally require an initial expectation of completion within two years and satisfaction of the section 448 gross-receipts test, excluding prohibited tax shelters. For tax years beginning in 2026, the inflation-adjusted threshold is $32 million in average annual gross receipts for the preceding three tax years, with applicable aggregation rules. See Revenue Procedure 2025-32, section 4.30.
Changing an established method can require Form 3115 and compliance with the applicable consent procedure. Revenue Procedure 2026-32 updates specified construction-method changes and applies to Forms 3115 filed after September 4, 2026. The covered changes use a cutoff approach for affected new contracts rather than a section 481 adjustment. Do not simply change the spreadsheet and assume the tax method changed.
Close the Period with an Exception List
- Reconcile recorded balances. Tie job-cost totals to the relevant general-ledger accounts. Investigate duplicate invoices, missing accruals, incorrect projects, prepayments and retainage. Keep support for each correcting entry.
- Refresh the forecast. Obtain a dated project-manager estimate, explain changes in price and remaining cost, and distinguish approved changes from disputed or pending items.
- Review losses and recoverability. A negative forecast may require more than a warning on the WIP report. For contracts within ASC 605-35, assess recognition of the entire anticipated loss when evident under the applicable rules. Separately evaluate relevant asset impairment and credit losses. See the ASC 605-35 loss provisions reproduced in DART.
- Reconcile funding and assign follow-up. Check actual cash, unpaid costs, expected collections and available financing. Record each unresolved difference, its potential effect, the responsible person and a resolution date.
Frequently Asked Questions
Is a lender draw construction revenue?
For an owner borrowing to construct a property, a loan advance is financing recorded as debt, with cash received or another documented use of the advance. It is not customer revenue. The contractor’s billing and revenue records are separate from the owner’s loan records.
If this raises questions about Construction Draw Schedules, “Construction Draw Schedules: Reconciling Lender Funding to Job Costs” addresses it directly.
Does every construction project use cost-to-cost revenue recognition?
No. First determine the applicable reporting framework and whether the contractor’s performance obligation qualifies for recognition over time. If it does, select a progress measure that faithfully depicts performance. An owner building its own rental property instead tracks qualifying construction asset costs and funding.
Why can job costs exceed payments without an error?
Work received before payment can create an accrued cost and a payable, including retainage. A payment made before the related work may instead be a prepayment. Reconciliation explains these timing and classification differences and checks their support; it does not force costs, billings and cash to equal one another.
Arrange the Scope of Accounting Support
Bring contracts, current forecasts, invoices, payment records, draw statements, owner-funding documentation and the general ledger when discussing a reconciliation with CPA Firm South Florida’s client team. Agree on the projects, reporting basis, deliverables and fees before the work begins. An accounting-record check is not automatically a formal financial-statement review or other assurance engagement.
The firm’s published tax-preparation pricing includes necessary cleanup for the quoted return. Ongoing construction reporting, broader reconstruction or additional advisory work should be addressed in the agreed engagement scope.