Key Takeaway: A work-in-progress schedule should connect contract terms, project progress, costs, revenue, invoices, collections, and remaining work. Define each column before using it: earned but unbilled revenue is not the same as costs incurred, money already paid, accounts receivable, or available cash.
This article is part of our guide to industry accounting specialties.
An architecture or engineering firm can have a full project calendar and still face a cash shortage. A design phase may be underway, employees may have been paid, and a contractual invoice milestone may still be weeks away. A useful monthly project report shows those different timelines and identifies the action needed for each.
Define WIP before comparing projects
“Work in progress,” or WIP, is used in different ways. A project manager may mean the sales value of performed work awaiting billing. A cost report may mean accumulated work costs. Financial statements may instead report contract assets, receivables, contract liabilities, or qualifying capitalized costs. One spreadsheet label should not silently stand for all of these.
For the management schedule in this article, the earned-versus-billed difference equals cumulative earned revenue minus cumulative billings. A positive amount flags performance ahead of billing; a negative amount flags billing ahead of performance. The difference is a reconciliation measure, not an automatic balance-sheet classification or proof of a right to invoice.
Under ASC 606’s presentation guidance, an unconditional right to consideration is a receivable: only time remains before payment is due. A right still dependent on another condition can be a contract asset. Payment or an unconditional amount due before performance can produce a contract liability. Issuing an invoice is not the sole classification test.
| Schedule item | Question it answers | Keep separate |
|---|---|---|
| Earned revenue | How much revenue belongs to performance through the reporting date? | Invoices sent and cash collected. |
| Billings | How much has been invoiced under the contract? | Whether the related work has been performed. |
| Collection status | Which amounts were received and which remain outstanding? | Current project profitability. |
| Costs incurred | What resources have been consumed or obligations recorded? | Amounts actually paid to staff and suppliers. |
| Remaining work | What committed performance remains after the reporting date? | Prospective work still in the sales pipeline. |
Track retainage with its release conditions and expected date. A contractual condition beyond the passage of time can keep the right conditional; a purely deferred due date presents a different issue. Also track disputes and collectibility rather than treating an expected release date as assured cash.
Determine the revenue method from the contract
For U.S. GAAP reporting, ASC 606-10-25-27 permits recognition over time when one of three tests is met: the customer receives and consumes benefits as performance occurs; the customer controls an asset as it is created or enhanced; or the asset has no alternative use to the firm and the firm has an enforceable right to payment for performance to date. Otherwise, recognition occurs at a point in time.
The FASB implementation Q&As explain that the third test requires both elements. A customized design alone is insufficient; the enforceable payment right must compensate performance, including a reasonable profit component. Contract law and termination terms matter. A progress-billing schedule alone does not establish the required right.
Once recognition over time is appropriate, choose an input or output measure that faithfully depicts performance. Cost-to-cost is one possible input method. Hours or milestones may be more suitable for another arrangement. Do not select the method merely because the software can calculate it or because another firm uses it.
Document changes and uncertain compensation separately. Variable amounts enter the transaction price only when a significant later revenue reversal is not probable. An unsigned fee request should not automatically enlarge recognized revenue. Have the accountant assess modifications rather than simply adding every proposed change to the original fee.
A complete $200,000 project example
The following is hypothetical. Assume a single $200,000 fixed-fee performance obligation qualifies for recognition over time and a cost-to-cost measure appropriately depicts progress. The estimated total costs included in that measure are $150,000. At month-end, $60,000 has been incurred, $60,000 has been billed, and $45,000 has been collected. There are no changes, credits, taxes, opening balances, or other adjustments.
| Measure | Calculation | Result |
|---|---|---|
| Progress | $60,000 incurred ÷ $150,000 estimated total cost | 40% |
| Cumulative earned revenue | $200,000 × 40% | $80,000 |
| Earned less billed | $80,000 − $60,000 | $20,000 |
| Billed balance outstanding | $60,000 − $45,000 collected | $15,000 |
| Remaining contract value | $200,000 − $80,000 earned | $120,000 |
| Estimated remaining cost | $150,000 − $60,000 incurred | $90,000 |
| Contribution before costs outside this project-cost base | $80,000 revenue − $60,000 project cost | $20,000 |
The $20,000 earned-versus-billed difference is not “labor and overhead already paid.” It compares revenue with invoices. The separate $20,000 contribution happens to be the same number under these assumptions, but it comes from a different calculation. Change billings to $70,000 and the billing difference becomes $10,000 while contribution remains $20,000.
Suppose $50,000 of the $60,000 incurred costs has actually been paid. Collections of $45,000 less those payments produce a $5,000 project cash outflow, with $10,000 of costs still payable. That cash result differs from both contribution and the unbilled amount. A firm-wide cash forecast must also include overhead, taxes, financing, and other projects.
For a balance-sheet illustration, assume the $15,000 billed amount is an unconditional receivable, while the $20,000 earned but unbilled amount depends on completing a future contractual milestone. The latter is a contract asset under that assumption. If the right to the $20,000 is already unconditional and only the administrative invoice is missing, the classification needs to reflect that different fact.
Update the estimate to complete using evidence
The forecast should describe the work still required: remaining design hours by role, consultant commitments, coordination, revisions, and other identifiable tasks. Review it with the project manager. A budget copied from contract signing may no longer represent the resources necessary to finish.
Continuing the example, suppose new information raises expected total cost from $150,000 to $180,000 while incurred costs remain $60,000. Under the same appropriate cost-to-cost method, progress becomes one-third and cumulative revenue becomes approximately $66,666.67. The earned-versus-billed difference falls to $6,666.67, and the total forecast contribution falls from $50,000 to $20,000 before costs outside the selected cost base.
This is a revision based on remaining work, not an arbitrary reduction of every project by a safety percentage. Explain the cause, who reviewed the estimate, and the resulting period adjustment. Keep an earlier forecast for comparison so later reviews can distinguish a new scope issue from a persistent estimating problem.
Costs that do not depict progress, such as significant unexpected waste, may require adjustment to an input measure. Paying a large supplier deposit also does not necessarily mean the related work is complete. Review those items before applying the percentage; do not make recognized revenue rise simply because inefficient work or advance payments increased spending.
Include consultant costs in a consistent margin model
Calling a consultant charge a “pass-through” does not settle its accounting. FASB’s principal-versus-agent guidance focuses on whether the firm controls the specified service before transfer to the customer. A principal reports the relevant revenue gross and records its cost; an agent reports the fee or commission for arranging the service. Assess each specified service under the arrangement.
A separate management measure can help analyze the firm’s own service effort, but define it explicitly. Assume $100,000 of gross project revenue includes $30,000 associated with outside consultants, whose matching cost is $30,000. Internal direct labor is $40,000 and allocated project overhead is $15,000.
- Gross presentation contribution after these costs: $100,000 − $30,000 − $40,000 − $15,000 = $15,000.
- Defined management net service revenue: $100,000 − $30,000 = $70,000.
- Contribution using that management base: $70,000 − $40,000 − $15,000 = $15,000.
Removing the consultant expense while retaining all $100,000 of revenue would inflate the result to $45,000. The correct contribution is 15% of gross revenue or approximately 21.43% of the defined net service revenue. Label the denominator, explain which overhead is included, and reconcile the management report to financial-statement presentation.
Keep backlog, invoices, and cash on separate timelines
For this management report, backlog means the value of committed work remaining to be performed at a stated date. It can include work already invoiced or prepaid. A deposit changes cash and billing information; it does not by itself remove an undelivered project from the delivery schedule.
Reconcile opening backlog plus new committed work and approved value changes, less performed value and cancellations, to closing backlog. Keep prospective proposals, optional phases, and disputed additions separately identified. Use the same inclusion policy month to month, and disclose whether reimbursable costs are included in reported backlog.
Allocate the remaining work to realistic delivery periods and staff roles. Then build invoice dates from the contract and expected receipt dates from payment terms and actual collection experience. A month with substantial forecast revenue may still have a cash shortfall if collections follow later.
Backlog Revenue Forecasting is covered in more depth in our related article, “Backlog Reporting: Turning Signed Work Into a Revenue Forecast.”
Run a monthly review with assigned follow-up
- Close the inputs. Confirm time records, consultant invoices or accruals, posted billings, receipts, and changes through the same cutoff date.
- Update remaining work. Have the project manager explain hours, dependencies, schedule changes, and the cost to finish.
- Review accounting judgments. Address recognition, contract rights, modifications, conditional balances, and collectibility.
- Reconcile the report. Tie revenue, project costs, receivables, contract balances, and receipts to the ledger; explain differences and record approved adjustments.
- Assign actions. Give each overdue invoice, billing hold, pending approval, or cost overrun an owner and next review date.
A growing unbilled figure may indicate an approaching milestone, a missed invoice, a dispute, or an unsupported progress estimate. Investigate the cause before deciding to bill. Likewise, an overrun may call for a scope conversation, a staffing change, or a revised bid assumption; it does not automatically create a right to charge the client more.
If this raises questions about Professional Service Accounting Controls, “Accounting Controls for Professional-Service Firms” addresses it directly.
Keep financial reporting and tax methods distinct
A project spanning two tax years does not automatically qualify for a tax long-term-contract method. Treasury Regulation 1.460-1(d) identifies architectural, design, engineering, and construction-management services as non-long-term-contract activities. Special allocation rules can apply when those activities are incident to a taxpayer’s own qualifying manufacturing or construction contract, and related-party arrangements need separate analysis.
Determine the permissible tax method from the actual activities and taxpayer’s circumstances. Maintain a reconciliation when tax treatment differs from the financial reports. Changing a management spreadsheet does not itself change the tax accounting method or establish eligibility to defer income.
Define the accounting support you need
Project managers supply progress and remaining-work estimates; bookkeeping staff maintain transaction records; accounting support addresses reconciliation and reporting. Forecasting or advisory work should have an agreed scope, delivery schedule, and responsibility for decisions. Do not assume every bookkeeping engagement includes a WIP review, a cash forecast, lender reporting, or CFO services.
For a discussion with CPA Firm South Florida’s accounting and tax team, prepare the active-project list, contracts, current estimates, billings, collections, and financial statements. Identify the most pressing reporting question and confirm which work is included in the engagement. A useful first deliverable is a reconciled project schedule with clearly defined columns and a short list of unresolved items.
Frequently asked questions
Does earned but unbilled work always mean an invoice should be sent?
No. Check the agreed billing trigger, supporting documents, and any unresolved acceptance condition. Assign a next action and date for each balance rather than assuming every amount can be invoiced immediately.
Is the earned-versus-billed difference the cost of labor already paid?
No. It compares revenue with billings. Labor cost, other project costs, supplier payables, and cash paid are separate measures that need their own reconciliation.
Can backlog include a project for which the client has paid a deposit?
Yes. A deposit does not mean the remaining work has been performed. Keep the remaining delivery commitment in the backlog schedule and the deposit in the billing and cash records.
What should be included in a monthly project review?
Use a common reporting date for contract changes, actual costs, the estimate to complete, earned revenue, billings, collections, remaining work, and assigned actions. Reconcile project totals to the books and explain material differences.
Does every architecture or engineering project use percentage-of-completion accounting?
No. Determine the applicable financial-reporting and tax methods from the arrangement and relevant rules. The cost-to-cost example in this article applies only under its stated assumptions.