What Are WIP Adjustments and Why Do They Matter?

By Martin · Updated 2026-02-02

WIP adjustments are the accounting entries that align your income statement with percentage-of-completion accounting. They adjust recognized revenue to match earned revenue based on job progress. Without proper WIP adjustments, your financial statements don't reflect the true profitability of your active projects.

If you've ever looked at your income statement and thought "this doesn't feel right" despite having accurate job costing, you're probably missing proper WIP adjustments. These accounting entries are the bridge between what you've billed and what you've actually earned based on percentage-of-completion. Get them wrong, and your financial statements are essentially fiction.

Why This Matters

Construction companies use percentage-of-completion accounting, which means you recognize revenue as you complete the work, not just when you bill or get paid. But your bookkeeper is recording revenue based on invoices you send, not based on completion percentage. That creates a gap.

The gap causes problems:

Your income statement shows profit on jobs that are actually losing money
Your balance sheet doesn't accurately reflect assets and liabilities
Your banker sees financial statements that don't match reality
Your tax return requires adjustments your CPA has to reverse-engineer
You make business decisions based on incorrect profitability data

WIP adjustments fix this gap by aligning your books with economic reality.

How WIP Adjustments Work

Think of WIP adjustments as a correction mechanism. Every month (or whenever you close your books), you compare:

What you've billed (revenue recorded on your income statement) vs. What you've earned (percentage complete × contract value)

Then you make an adjustment to bring them into alignment.

Example: Under-Billed Job

You're building a warehouse with a $1.2M contract. You're 60% complete based on cost-to-cost percentage (you've spent $540K of a $900K estimated total cost). Here's what you've earned vs. what you've billed:

Earned revenue: $1.2M × 60% = $720K
Billed to date: $600K (you're holding back billing until certain milestones)
Gap: $720K earned – $600K billed = $120K under-billed

Your WIP adjustment:

Debit: Costs & Estimated Earnings in Excess of Billings (asset account) — $120K
Credit: Revenue (income statement) — $120K

This adjustment adds $120K to your revenue on the income statement and creates a $120K asset on your balance sheet. Why an asset? Because you've earned that revenue — the customer owes it to you even though you haven't invoiced it yet. It's unbilled receivables.

Example: Over-Billed Job

Now consider a different project: a $2M contract where you've billed aggressively but progress is slower than planned.

Earned revenue: $2M × 40% = $800K (you're 40% complete)
Billed to date: $1.1M (you billed for mobilization, materials, and monthly progress)
Gap: $1.1M billed – $800K earned = $300K over-billed

Your WIP adjustment:

Debit: Revenue (income statement) — $300K
Credit: Billings in Excess of Costs & Estimated Earnings (liability account) — $300K

This adjustment reduces your revenue by $300K and creates a $300K liability on your balance sheet. Why a liability? Because you've billed for work you haven't completed yet. If the customer canceled the job today, you'd owe them that money back. It's essentially a customer deposit or advance billing.

Why Your CPA Asks for This at Year-End

If you're not making monthly WIP adjustments, your CPA has to make them at year-end to produce accurate financial statements for your tax return and bonding package.

Here's what happens without regular adjustments:

Your monthly P&L shows profit based purely on billing, which could be wildly inaccurate
At year-end, your CPA reviews your WIP schedule and makes massive adjusting entries
Your December financial statements show huge swings that have nothing to do with December performance
You've been making decisions all year based on incorrect profitability data

I've seen contractors show a $400K profit through November, then "lose" $150K in December — not because December was bad, but because the year-end WIP adjustment corrected 12 months of over-billing that nobody had been tracking monthly.

Monthly vs. Annual WIP Adjustments

Annual adjustments (dangerous):

You operate all year with incorrect financial statements
You make pricing, hiring, and bidding decisions based on false profitability
Year-end adjustments create massive swings that confuse everyone
You can't identify margin fade until it's too late to fix

Monthly adjustments (best practice):

Your financial statements reflect reality every month
You identify over-billing or under-billing early and adjust billing accordingly
You spot margin fade when there's still time to course-correct
Your year-end close is clean because adjustments have been ongoing
Your banker and surety see consistently accurate financials

Common Mistakes

Forgetting to reverse the prior month's adjustment. WIP adjustments are cumulative, not incremental. Each month, you reverse last month's adjustment and record the new one based on current completion percentages.

Not adjusting for estimated cost changes. If your estimated total cost goes from $900K to $1.1M, your completion percentage changes even if actual costs are the same. Your adjustment needs to reflect the new estimate.

Treating WIP adjustments as optional. They're not. If you're a contractor using percentage-of-completion accounting (which you should be), WIP adjustments are required for accurate financial statements.

Only adjusting at year-end. This defeats the purpose. You need accurate monthly financials to run your business effectively.

The Bottom Line

WIP adjustments are the mechanism that makes your income statement reflect economic reality instead of just billing timing. An under-billed job creates an asset (you've earned revenue you haven't invoiced yet). An over-billed job creates a liability (you've billed for work you haven't done yet).

Without proper monthly WIP adjustments, your financial statements are unreliable. You're making strategic decisions about profitability, growth, and capacity based on data that doesn't reflect the true performance of your jobs.

The good news is that once you have a solid WIP reporting process in place, making the adjustments is straightforward. Modern construction accounting software can even automate them based on your WIP schedule. But whether automated or manual, they need to happen every month, not just when your CPA asks for them at year-end.

If you're not currently making monthly WIP adjustments, start. Your future self (and your banker, and your surety) will thank you when your financial statements actually mean what they appear to mean.