Contractor WIP Schedule at Year End: Percentage of Completion
For a contractor on percentage of completion, revenue for the year is the share of each contract that was complete on December 31, whether or not it was billed. The contractor WIP schedule is where that gets calculated, job by job, and it’s the document that decides the year-end tax bill, the year-end balance sheet, and what the bonding agent thinks of you in the spring. Built in December from real job costs, it’s an hour of work. Rebuilt in March from memory, it’s a week, and it’s wrong.
We run an accounting firm, and for our contractor clients the WIP schedule is the last step of the December close and the first input to the return. Here’s what it does and how it’s built.
What is a WIP schedule for contractors?
A work-in-progress schedule is a table with one row per open job and a handful of columns: contract value, estimated total cost, costs to date, percent complete, revenue earned to date, billed to date, and the difference between earned and billed. That last column is the one that matters.
Under percentage of completion, the percent complete is usually costs to date divided by estimated total cost. A job with a $500,000 contract and $400,000 of estimated cost, with $300,000 of cost incurred so far, is 75% complete. Earned revenue is 75% of $500,000: $375,000. If you’ve billed $350,000, you’re underbilled by $25,000. If you’ve billed $400,000, you’re overbilled by $25,000.
The schedule adds those up across every open job and produces the two adjustments that make the year-end financials right.
Over- and underbilling
The two are opposites, and they land on opposite sides of the balance sheet.
- Overbilled means you’ve invoiced more than you’ve earned. The customer paid ahead of the work. That excess is a liability, “billings in excess of costs and estimated earnings,” because you owe the customer the work. On the P&L, it reduces revenue for the year to what was actually earned.
- Underbilled means you’ve earned more than you’ve invoiced. The work is done and the bill hasn’t gone out, or the schedule of values is back-loaded. That’s an asset, “costs and estimated earnings in excess of billings,” and it adds revenue for the year that hasn’t been billed yet.
Without the schedule, the books show revenue equal to billings, which is whatever the billing cycle happened to produce. A contractor who front-loads the schedule of values looks more profitable than they are in the year the job starts and less in the year it finishes. One who bills late looks the reverse. Neither matches what the business actually did.
How does percentage of completion affect my taxes?
Directly. Under percentage of completion, taxable revenue for the year is earned revenue, not billed revenue. An underbilled job adds taxable income for the year even though the invoice hasn’t gone out. An overbilled job defers income to next year even though the cash is already in the bank.
That’s why the schedule decides the tax bill, and why building it in December instead of March matters: in December, there’s still time to do something about it. If the schedule shows a large underbilling, the fourth-quarter estimate needs to reflect it. If it shows a job that’s over budget and heading toward a loss, that loss can be recognized when it becomes known, which affects the number too. A schedule built in March reports a tax bill that’s already been decided.
Whether you’re required to use percentage of completion for tax depends on your size and the kind of contracts you do. Smaller contractors under the gross receipts threshold, and home construction contracts, have other methods available, and the right choice is a conversation with your preparer. But if you’re bonded or have a lender who wants percentage-of-completion financials, the schedule gets built regardless.
Is retainage taxable income?
Under percentage of completion, yes, when it’s earned. Retainage is the 5% or 10% the customer holds back from each progress payment until the job is complete. It’s revenue you’ve earned and can’t spend, and it belongs on the schedule as part of billed and earned, with the withheld amount sitting on the balance sheet as a retainage receivable.
Contractors who leave retainage off until it’s collected understate revenue during the job and then have a surprise in the year it’s released. On the schedule, it’s earned as the work is done, and the receivable tells the lender and the owner how much cash is tied up waiting on job closeouts.
Building the schedule
The schedule is only as good as three inputs, and all three come from the monthly close.
- Costs to date, by job. Every labor hour, material invoice, subcontractor bill, and equipment charge coded to the job it belongs to, every month. If job costing has been sloppy, the percent complete is wrong and everything downstream is wrong with it.
- Estimated total cost, updated. The original estimate is a starting point. By December, the project manager knows which jobs are running over, and the estimate on the schedule has to reflect that, or the percent complete is overstated and the job looks better than it is.
- Billed to date, by job. From the invoices, including retainage.
With those in place, the schedule builds in an hour. Without them, it builds from whatever the project managers remember, and it’s a negotiation instead of a calculation.
The bonding agent
The same schedule goes to the surety, who reads it differently. The bonding agent isn’t calculating tax. They’re reading each job for gross profit fade: whether the margin on the job has dropped since the last schedule they saw. A job that was estimated at 20% margin and is now showing 11% is a job that’s over budget, and a contractor whose jobs consistently fade is a contractor whose bonding capacity shrinks.
So the schedule serves two readers. The preparer wants earned revenue for the return. The surety wants the trend in job margin. Same page, and the trend is only readable if the schedule has been built consistently, quarter after quarter, from the same job costing.
What a CFO does with this number
A fractional CFO reads the schedule for the jobs that are quietly over budget before the final draw. The percent complete says 85%; the costs say the remaining 15% of the work is going to cost 30% of the budget; the job is going to lose money and nobody has said so yet. The schedule, built monthly instead of just at year end, shows that while there’s still a change order to write, a scope to negotiate, or at least a final draw to protect.
It also shows the pattern across jobs: which estimator’s jobs fade, which kind of work carries margin, which customers hold retainage the longest. That’s what the pricing conversation for next year is built on.
Where we come in
Job costing is part of the monthly close for our contractor clients, so costs to date, billed to date, and retainage are right every month and the WIP schedule builds in December from numbers that already exist. The return follows in February, built from the schedule, and the same schedule goes to the surety. If your WIP schedule gets built in March from what the project managers remember, reach out. We’ll show you what December’s version would have said.
Frequently asked questions
What is a WIP schedule?
A job-by-job list of contract value, percent complete, costs to date, and billed to date that computes earned revenue and over/underbillings at a point in time.
How does percentage of completion affect taxes?
Revenue is recognized as work is done, so an underbilled job adds taxable revenue and an overbilled job defers it, regardless of invoicing.
Is retainage taxable?
Under percentage of completion, yes, when earned, even though the customer holds it until the job closes.
