A construction business can report a healthy profit while struggling to pay subcontractors, suppliers, payroll or VAT. This often happens because management accounts show revenue earned from work completed, while the related cash remains tied up in applications, certifications, retentions or overdue customer payments.
Work in progress, usually called WIP, helps explain this gap. Accurate WIP reporting gives main contractors a clearer view of contract profitability, amounts recoverable from customers and the cash that is actually available to run the business.
What WIP Means in Construction
WIP represents the value of incomplete work at a reporting date. In construction, it compares the progress made and costs incurred on live contracts against the revenue recognised in the accounts or invoiced to the customer.
It is not simply a list of unpaid invoices. WIP is a job by job assessment of what has been earned, what has been spent and whether the latest forecast still supports the expected contract margin.
For financial reporting, income is generally recognised when the contractor gains the right to consideration for work performed, rather than only when cash reaches the bank account. Tax computations will usually follow the accounting treatment of recognised revenue and expenditure, subject to specific tax law rules.
Why Profit and Cash Differ
A project can create accounting profit before it generates cash. A main contractor may have completed work, incurred labour and material costs, and recognised revenue in the accounts, but still be waiting for:
- A valuation to be agreed
- An application for payment to be certified
- The customer to pay an invoice
- Retention to be released
- A variation claim to be approved
- A disputed amount to be settled
At the same time, subcontractors, suppliers, employees and HMRC expect payment according to their own payment terms. This creates a funding gap even where the profit and loss account looks positive.
A Simple WIP Example
A contractor is working on a £500,000 contract. At month end, the project surveyor estimates the job is 60% complete and the expected total cost remains £400,000.
| Item | Amount |
|---|---|
| Contract value | £500,000 |
| Estimated completion percentage | 60% |
| Revenue earned to date | £300,000 |
| Estimated total cost | £400,000 |
| Cost incurred to date | £240,000 |
| Expected profit to date | £60,000 |
| Amount invoiced to customer | £200,000 |
The accounts may recognise £300,000 revenue and £240,000 costs, producing £60,000 gross profit. However, only £200,000 has been invoiced and perhaps less has been received. The £100,000 difference is an unbilled contract asset or accrued income, not cash.
If the contractor has paid suppliers and subcontractors £230,000, the project can appear profitable while creating a severe cash shortage.
The Most Common WIP Errors
Using Invoices Instead of Progress
Relying only on invoices can understate or overstate performance. Applications may be delayed, valuations may not reflect the latest site progress and invoices may include advance payments. WIP should be based on reliable progress evidence, including valuations, site reports, approved variations and updated costs to complete.
Ignoring Cost to Complete
A project may look profitable because costs booked so far are low. That result is unreliable if labour, materials, plant, subcontractor claims, preliminaries or remedial work still to come have not been included in the forecast.
The key measure is not just cost spent. It is the total expected cost of completing the contract. If expected costs increase, WIP and forecast profit must be updated immediately.
Treating Retention as Available Cash
Retention is part of the contract price held back until completion or the end of a defects period. It may be earned for accounting purposes, but it is not available to fund current payroll or supplier payments.
Construction contracts often retain a percentage of the price to protect the customer against defects. VAT on retention is normally delayed until the retention is paid or invoiced, whichever happens first, rather than becoming due under the usual basic tax point rules.
Leaving Variations Out of Forecasts
Unapproved variations can create a misleading position. If a contractor has incurred costs on additional work but recovery is not yet sufficiently certain, recognising revenue too early can inflate profits. If approved work is omitted altogether, management cannot see the true commercial position.
Maintain a variation register showing quoted value, cost incurred, approval stage, value recognised and expected payment date.
Delayed Information From Site
WIP is only as good as the data behind it. Late supplier invoices, missing timesheets, unrecorded plant hire, subcontractor claims and poor purchase order controls can make a profitable job look healthier than it is.
WIP, VAT and CIS
WIP does not automatically determine the VAT due date. VAT usually depends on the tax point, which may be created by an invoice, payment or other VAT rules. Retention has its own special tax point treatment.
Main contractors must also maintain accurate CIS records. CIS deductions are calculated after excluding qualifying materials and VAT where applicable. Registered subcontractors are generally subject to a 20% deduction, unregistered subcontractors to 30%, while gross payment status allows payment without deduction.
Poor WIP reporting can make these obligations harder to manage because cash forecasts may fail to allow for VAT payments, CIS deductions, PAYE and supplier liabilities.
Building a Better Monthly WIP Report
A useful WIP report should be prepared monthly for every material live project. It should include:
- Original contract sum and approved variations
- Revised contract value
- Costs incurred to date by labour, materials, plant, subcontractors and preliminaries
- Latest estimate of cost to complete
- Total forecast cost and forecast final margin
- Revenue earned to date based on reliable contract progress
- Amounts applied for, certified, invoiced and received
- Retention held by the customer
- Retention owed to subcontractors
- Accrued income, deferred income and known disputes
- Expected cash receipts and payments for the next 13 weeks
The project manager, quantity surveyor and finance team should review this together. Finance can then compare commercial progress with the accounting records and cash forecast before the month end accounts are finalised.
Tax and Accounting Implications
Overstated WIP can lead to revenue and profit being recognised too early. This can produce unexpected Corporation Tax, create misleading accounts and affect lender or bonding discussions.
Understated WIP can hide earned income, distort management decisions and weaken the balance sheet presented to banks, suppliers or investors. Since tax normally follows the revenue and expenditure recognised in accounts, inaccurate WIP can also create errors in the Corporation Tax computation.
A loss making contract requires particular attention. Once it is clear that the total expected costs will exceed total contract revenue, the expected loss should not be deferred simply because the project is unfinished. Obtain professional accounting advice where this risk arises.
How Construction Tax Accountants Help
Construction WIP is not just an accounts adjustment at year end. It is a live management tool that can show whether a profitable looking contract is quietly consuming the company’s cash.
Construction Tax Accountants work with principal contractors to turn site and commercial information into reliable monthly management accounts, tax reporting and forward cash flow decisions.
- Set up job costing and cost code structures for live contracts
- Prepare monthly WIP, contract asset and contract liability calculations
- Review revenue recognition against valuations, certifications and contract terms
- Challenge costs to complete and identify weakening margins early
- Reconcile applications, invoices, customer receipts and retentions
- Build 13 week cash flow forecasts for payroll, VAT, CIS, suppliers and subcontractors
- Review the VAT treatment of construction services and retention payments
- Support CIS verification, deduction calculations and monthly submissions
- Prepare year end accounts and Corporation Tax computations using reliable contract data
- Provide management reporting that helps directors take action before cash pressure becomes critical
FAQs:
What is WIP in construction accounting?
WIP is the value of incomplete contract work at a reporting date. It compares work completed, costs incurred, revenue earned, invoices raised and future costs needed to finish the project.
Can a construction company make a profit but run out of cash?
Yes. Revenue may be recognised for completed work before the customer pays, while the contractor must still pay workers, subcontractors, suppliers, VAT, CIS and other costs. Retentions and disputed valuations can extend this gap.
Is retention treated as cash in a WIP report?
No. Retention may be included as money due from the customer when recovery is expected, but it should be separately tracked because it is not available cash and may not be released until completion or the end of the defects period.
Does WIP affect Corporation Tax?
Yes. Corporation Tax generally follows the profit reported in the accounts, subject to tax adjustments. If WIP causes revenue or costs to be misstated, taxable profits can also be misstated.
