Construction businesses should never underestimate the importance of construction-in-progress (CIP) accounting.
Doing so opens the door to distorted financial statements, poor budgeting and forecasting, lack of project visibility, and even the potential for violations of Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and U.S. tax law.
CIP accounting makes it easier to avoid those issues and helps you get a more accurate picture of business spending and activity.
In this article, we discuss the CIP accounting process in detail so you can keep your business building toward success.
Key Takeaways
- Construction-in-progress (CIP) accounting is the process of tracking and recording all expenses incurred during the construction or development of a fixed asset.
- Until the asset “goes live,” all costs, and the value of the asset itself, are considered to be non-depreciable fixed assets.
- CIP accounting should always take into account direct costs such as materials, labor, fees, permits, licenses, site prep, insurance, and equipment costs, as well as indirect costs such as manager salaries, temporary office trailers, and even regular business overhead.
- CIP accounting best practices include tracking and keeping records for all expenses, creating an organizational system, using job codes and spending categories to separate costs, understanding capitalization rules, reconciling the CIP account regularly, and consulting with a construction accountant.
What Is CIP Accounting?
Construction-in-progress (CIP) accounting is a system for tracking and recording all expenses incurred during the construction or development of a fixed asset. This asset is not yet complete or in use by the business.
While a project is active, all expenses for that project are recorded in a special CIP account listed on the business’s main ledger or balance sheet, which shows what the business owns and owes. This special account is classified as a non-depreciable fixed asset.
Once construction is complete, the value of the CIP account is transferred to the main ledger where it starts to depreciate.
Think of your main ledger as the top of a pyramid. Branching off below that main ledger is one, two, three, or more CIP accounts (one for each project in progress).
The value of those accounts show as a line item on the main ledger, but within each CIP account is an extensive organization system that tracks every dollar spent on a project.
Why Is CIP Accounting Important?
CIP accounting is important for a variety of reasons. Let’s take a look.
Accurate financial reporting: There’s a very real need to keep all project costs separate from the main ledger. Doing so makes reporting easier and gives you an accurate picture of your business’s financial health.
Cost control: CIP accounting acts like a magnifying glass for spending. With a healthy system in place, owners and managers can easily see if a project is on budget or not and make changes to keep things under control.
Budgeting: With help from CIP accounting from past projects, you can create a more accurate budget for future construction.
Transparency: CIP accounting makes it clear where the money for a big project is coming from and where it’s going so that owners and investors can trust that things are being managed honestly and responsibly.
Compliance: By using CIP accounting, businesses comply with Generally Accepted Accounting Principles (GAAP) that serve to keep the company out of trouble with federal, state, and local governments as well as the IRS.
Informed decision-making: When you have detailed records of every cost listed in your CIP accounting, you can make more informed decisions about the project. For example, you might decide to speed up the project to save on labor costs or choose a different material if the original one is too expensive.
What To Include In CIP Accounting
CIP accounting should include everything that your business spends on a given project. This typically includes three main cost categories: direct, indirect, and overhead.
Direct costs: Direct costs include expenses necessary for the actual work being done, such as materials, labor, equipment, and subcontractors.
Indirect costs: Indirect costs include things like permits and licenses, insurance, administration, site security, fuel, and material transport.
Overhead: Overhead costs are what keep your business running, such as rent and utilities. These are sometimes considered a subset of indirect costs, but for CIP accounting, it’s important to keep them distinct so that your business charges enough to keep the lights on.
CIP Accounting Best Practices
Track Everything
One of the most important best practices for successful CIPaccounting is to track everything.
Every single expense for the project, no matter how small or insignificant it may seem, should be recorded in your CIP account. This means keeping itemized receipts, invoices, and detailed records of all labor hours (just to name a few).
Basically, every dollar (or cent) spent should be accounted for. Why?
First, because on large, long-term construction projects, small amounts can quickly add up to large expenses.
Second, without an accurate picture of all costs, the system won’t work as intended, and you may run into compliance, budget, or funding problems down the road.
Keep Costs Separate And Spending Records Organized With Job Codes
In order to track everything successfully, it’s vital to keep all spending records organized. In most cases, this means creating job cost codes for each unique project in progress.
For example, you may have Project A, Project B, and Project C running at the same time. Within Project A, you may have a unique cost code for concrete, another for lumber, another for electrical supplies, and another for labor. The same goes for Project B and Project C.
Whenever you or someone in your business buys something, mark the expense with a cost code so you know which project and which category it belongs to.
Authorize All Expenses
With multiple projects running at the same time, or even one large project running all by itself, unauthorized spending can quickly spiral out of control if not monitored closely.
Make sure that all expenses are authorized properly before they’re incurred so management knows what to expect, can make decisions on spending, and can keep the project on budget.
Reconcile Regularly
Don’t wait until the end of a project to look at CIP accounting. Regularly review the progress of the project against the budget and reconcile your CIP account(s) with all bank statements, supplier invoices, and other spending and earning records.
Is everything on track? Do you see (or project) any unexpected cost overruns? Early detection of errors or discrepancies can prevent them from growing into larger issues and can help you find better solutions to the problems that come up.
Understand Capitalization Rules
Capitalizing (or moving) the CIP account to your main ledger too early or too late can lead to misstatements in financial reports and possible problems with federal, state, and local laws.
Capitalization timing can be a grey area, so it’s important to create internal guidelines after consulting with a CIP accounting professional.
Consult With An Accounting Professional
Beyond just helping you understand capitalization rules, a construction accounting professional can help you navigate complex accounting and procedural rules so your company stays in compliance with all relevant regulations.
How Coast Can Support Your Construction Business
Construction accounting can be complex, especially when projects span months, involve multiple vendors, and require precise cost tracking to protect margins. Coast is built with construction businesses in mind. With a single card and expense management platform, you can:
- Track purchases by project, phase, or cost code
- Control spending with category and merchant restrictions
- Capture receipts and job codes instantly from the field
- Work seamlessly with your accounting software or construction ERP for faster month-end close
Whether you’re managing job site expenses, equipment rentals, or fuel costs, Coast gives you the visibility and control you need to keep projects on budget and accounting accurate.
For more details about how Coast can help your business, visit CoastPay.com.
Frequently Asked Questions [FAQs]
What type of asset is CIP on the balance sheet?
CIP expenses are categorized as fixed assets on the balance sheet. Unlike other fixed assets, though, CIP spending doesn’t depreciate until construction is complete and the asset goes into service.
The CIP account is a special file or ledger where you record all expenses for a specific project. Think of it as a supplement to your business’s overarching main ledger or balance sheet.
Within the CIP file itself, everything will be organized and categorized for easy reference, but on the main ledger, the CIP account will show as a single total that doesn’t depreciate while the asset is under construction.
How are costs recorded in CIP accounting?
As purchases are made, those construction costs are recorded as debits in the CIP ledger. Once the project is finished and the asset is ready for use, you credit the total accumulated costs in the CIP ledger to reduce the figure to zero.
You then debit the total cost to the appropriate fixed asset account (e.g., Buildings, Machinery, etc.) where it can begin to depreciate.
What are the most common challenges in CIP accounting?
Some of the most common challenges in CIP accounting are accuracy (i.e., keeping track of everything), delayed entries that can distort financial reporting, manual errors, and scope changes that modify some aspect of the project.
These challenges can be minimized by implementing dedicated accounting software for fixed asset management, establishing strict guidelines for managing CIP costs, reviewing CIP accounts regularly, maintaining thorough records, and consulting financial professionals with expertise in construction accounting.
