What is Construction in Progress?

Q: What is Construction in Progress?

Construction in Progress is an asset account used to track capital project costs before the asset is completed, placed into service, and depreciated.

Definition

Construction in Progress is an asset accounting category used to track costs for assets that are being built, developed, installed, or prepared for use but are not yet ready for their intended operation. It is often recorded as Construction-in-Progress (CIP) on the balance sheet until the project is complete. These costs may include materials, labor, engineering, installation, site preparation, professional fees, and directly attributable project costs.

How Construction in Progress Works

When a company starts a capital project, eligible costs are accumulated in a CIP account instead of being expensed immediately. The costs remain in Capital Work-in-Progress (CWIP) while the asset is under construction. Once the asset is ready for use, finance transfers the balance to the appropriate fixed asset category, such as buildings, machinery, equipment, or leasehold improvements.

CIP is important because the asset is not usually depreciated while it is still being constructed. Depreciation generally begins when the Asset Under Construction is placed into service and can generate economic benefit. This treatment helps align expense recognition with actual asset usage.

Core Components

A strong Construction in Progress record should clearly show what project the cost belongs to, why the cost is capitalizable, and when the asset will be ready for use.

Project code: Links costs to a specific construction, implementation, or capital project.
Capitalized costs: Includes eligible labor, materials, contractor charges, freight, installation, and professional fees.
Approval evidence: Connects spend to approved budgets, purchase orders, contracts, or project authorization.
Transfer date: Marks when the completed asset moves from CIP to a fixed asset account.
Supporting documentation: Provides invoices, schedules, completion certificates, and project status evidence.

Calculation and Worked Example

A practical formula is: Ending CIP balance = Opening CIP balance + Capitalized additions - Transfers to fixed assets.

For example, assume a company begins October 2025 with an opening CIP balance of $250,000 for a warehouse expansion. During the month, it capitalizes $90,000 of contractor costs, $35,000 of materials, and $15,000 of engineering fees. It also transfers $120,000 to buildings because one section is ready for use. The ending CIP balance is $250,000 + $90,000 + $35,000 + $15,000 - $120,000 = $270,000. This $270,000 remains in CIP until the related construction is completed and placed into service.

Accounting and Reporting Treatment

Construction in Progress is typically shown as part of property, plant, and equipment on the balance sheet. It supports asset capitalization because eligible project costs are recorded as assets rather than current-period expenses. This improves financial reporting by separating long-term capital investment from operating costs.

Finance teams use CIP records to support fixed asset accounting, project tracking, depreciation timing, and audit review. When construction is completed, the balance is moved from CIP to the final asset class. From that point, depreciation expense is recorded based on the asset’s useful life and approved depreciation method.

Common Use Cases

Construction in Progress is used for large projects where costs accumulate over time before the asset becomes operational. It is common in manufacturing, real estate, utilities, infrastructure, technology, healthcare, and logistics businesses.

Typical examples include new factories, office buildings, production lines, warehouse automation, enterprise software implementation, power infrastructure, and major facility upgrades. In project-based environments, CIP may overlap with Work-in-Progress (WIP), but CIP is specifically focused on capital assets, while WIP may also relate to inventory, production, or service delivery depending on the business model.

Controls and Review

Strong CIP controls help ensure that only eligible costs are capitalized and that completed assets are transferred on time. Reviewers should confirm the project approval, supplier invoices, contract terms, capitalization policy, project status, and expected in-service date. This helps prevent completed assets from remaining in CIP after they are ready for use.

CIP review also supports cash flow visibility because capital projects often involve large payments over several months or years. Where contractors bill in stages, Progress Billing should be matched to approved project milestones, purchase orders, and construction evidence. This improves budget tracking, project governance, and financial reporting accuracy.

Business Impact

Construction in Progress gives finance leaders visibility into capital projects that are still being developed. It helps track how much cash has been invested, which projects are nearing completion, and when depreciation will begin. This is important for capital planning, budget control, profitability forecasting, and asset performance review.

Well-managed CIP also supports better capital expenditure decisions. Finance can compare approved budgets with actual project spend, monitor completion timelines, and evaluate whether capital projects are supporting expected business performance.

Summary

Construction in Progress is an asset accounting category used to accumulate capital project costs before an asset is ready for use. It supports capitalization, project tracking, balance sheet reporting, transfer to fixed assets, and depreciation timing. With clear project coding, supporting documentation, cost review, and transfer controls, Construction in Progress helps finance teams improve cash flow visibility, financial reporting accuracy, and capital investment discipline.