Construction in progress accounting is the method of accumulating the capitalized costs of a fixed asset you are building for your own use into a dedicated balance-sheet account until that asset is finished and ready to operate. Companies use a construction in progress (CIP) account to hold materials, labor, and other direct costs of a self-constructed asset while the project is underway, then reclassify the full balance to the appropriate fixed-asset account and begin depreciation once the asset is substantially complete and ready for its intended use.
Quick answer: CIP is a non-current asset account within property, plant, and equipment. You capitalize direct construction costs and, where applicable, construction-period interest into CIP as they are incurred. CIP is not depreciated while the asset is being built. When the asset is substantially complete and ready for its intended use, you move the accumulated CIP balance into a depreciable fixed-asset account and start depreciation. CIP is a fixed-asset treatment, not the same thing as a contractor’s work-in-process (WIP) schedule.
This article explains what belongs in CIP, how the accounting works from first cost to final reclassification, how CIP differs from a contractor’s WIP schedule, and the errors that most often trip up companies building assets for their own use.
What Construction in Progress Is
Construction in progress represents the accumulated cost of a fixed asset that a company is constructing or installing but that is not yet ready to be used. It sits within the property, plant, and equipment (PP&E) section of the balance sheet as a long-term asset. The account exists because a partially built warehouse, a data center under construction, or a production line being assembled has real economic value, and that value needs to appear on the balance sheet even though the asset cannot yet generate revenue.
Under U.S. generally accepted accounting principles, CIP falls under the guidance in FASB Accounting Standards Codification Topic 360, Property, Plant, and Equipment. A self-constructed asset is recorded at its historical cost, which is the sum of the costs necessary to bring the asset to the condition and location required for its intended use. CIP is the temporary holding account where those costs collect until the asset is done.
A distinguishing feature of CIP is that it carries no accumulated depreciation. Because the asset is not yet in service, it is not being consumed, so no depreciation is recorded against it. The balance grows as construction costs are incurred and stays on the books at gross capitalized cost until the project is complete.
CIP applies whenever a company builds an asset for its own operations. Common examples include a manufacturer building a new plant, a retailer constructing a distribution center, a utility installing new infrastructure, or a business fitting out a large equipment installation. In each case the company is the eventual owner and user of the asset, not a contractor building it under contract for a customer.
What Costs Are Capitalized Into CIP
The general principle is that costs directly attributable to constructing the asset and getting it ready for its intended use are capitalized into CIP. Costs that are not directly attributable, or that relate to periods before or after active construction, are generally expensed as incurred. Getting this line right matters, because over-capitalizing inflates assets and understates current expense, while under-capitalizing does the reverse.
Direct costs that typically qualify for capitalization include:
- Direct materials used in the construction of the asset.
- Direct labor of workers building or installing the asset.
- Payments to outside contractors and subcontractors engaged on the project.
- Architectural, engineering, and other professional fees tied to the build.
- Permits, inspection fees, and site-preparation costs.
- Freight, installation, and testing costs necessary to make the asset operational.
Construction-period interest is a special category. Under FASB ASC 835-20, Capitalization of Interest, interest cost incurred while a qualifying asset is being readied for its intended use is capitalized as part of the asset’s cost rather than expensed. A self-constructed asset for the company’s own use is a qualifying asset. Interest is capitalized only during the period in which construction activities are actually in progress, and the amount capitalized cannot exceed the total interest cost the company actually incurred in the period.
Certain costs should not go into CIP. General and administrative overhead that would have been incurred regardless of the project, selling costs, and abnormal amounts of wasted material, labor, or other resources are expensed rather than capitalized. Interest capitalization also stops when construction pauses for extended periods or when the asset is substantially complete, even if minor finishing work remains.
How CIP Differs From a Contractor’s WIP Schedule
This distinction causes the most confusion in construction in progress accounting, so it is worth being precise. Construction in progress and a contractor’s work-in-process schedule are two different concepts that share the word “construction” and similar-sounding names. They live in different parts of the accounting model and answer different questions.
CIP is a fixed-asset treatment. It applies to a company that is building an asset it will own and use itself, and it measures the accumulated cost of that self-constructed asset. The output is a balance-sheet asset within PP&E that eventually becomes a depreciable fixed asset. There is no revenue recognition involved, because the company is not selling anything.
A contractor’s WIP schedule is a revenue-recognition and contract-accounting tool. It applies to a construction contractor performing work for customers under contracts, and it measures earned revenue, costs, billings, and the resulting contract assets (underbillings) and contract liabilities (overbillings) under the percentage-of-completion approach. That work is governed by revenue guidance under ASC 606, not by fixed-asset guidance. The asset a contractor builds becomes the customer’s property, not the contractor’s fixed asset.
In short, CIP asks “how much has this asset I am building for myself cost so far?” A WIP schedule asks “how much revenue have I earned on my customer contracts, and how does that compare to what I have billed?” A single company can encounter both. A contractor that builds its own new headquarters would use CIP for the headquarters project and a WIP schedule for its customer jobs. Keeping the two frameworks separate on the books prevents misclassified costs and misstated revenue.
Recording CIP and Reclassifying to a Fixed Asset
The mechanics of CIP accounting follow a straightforward path from the first invoice to the moment depreciation begins. As construction costs are incurred, they are debited to the CIP account. If a company pays a contractor $200,000 for foundation work, it debits construction in progress for $200,000 and credits cash or accounts payable. Each subsequent cost, whether materials, labor, professional fees, or capitalized interest, is added to CIP in the same way, so the account balance climbs over the life of the project.
Throughout construction, no depreciation is recorded. The asset is not yet in service and is not being consumed, so the CIP balance simply reflects gross accumulated cost. This is a defining trait of the account and a frequent source of error when someone assumes depreciation should begin as soon as spending starts.
The pivotal event is the reclassification. Under ASC 360, CIP is transferred to the appropriate fixed-asset account when the asset is substantially complete and ready for its intended use. The trigger is readiness, not the calendar date the company happens to start using it. At that point the company debits the fixed-asset account (for example, Buildings or Machinery and Equipment) and credits construction in progress for the full accumulated balance, zeroing out CIP.
Depreciation begins once the asset has been reclassified and is ready for use. The company selects a useful life and depreciation method appropriate to the asset and starts recording periodic depreciation expense against the now-depreciable fixed asset. Because the timing of reclassification determines when depreciation starts and when interest capitalization stops, companies with large capital projects should document their readiness assessment carefully, since it affects the balance sheet, expense recognition, and taxable income.
Common Errors in Construction in Progress Accounting
Several mistakes recur in CIP accounting, and most stem from either the timing of reclassification or confusion over what belongs in the account. Watching for these keeps the balance sheet accurate and the audit clean.
- Leaving completed assets in CIP. The most common error is failing to reclassify an asset once it is substantially complete and ready for use. Assets that sit in CIP after they are ready understate depreciation expense, overstate assets, and can distort tax positions. Balances should be reviewed regularly to identify projects that are finished.
- Starting depreciation too early or too late. Depreciation should begin when the asset is ready for its intended use, not when spending starts and not long after the asset is actually operating. Misjudging this point misstates expense.
- Capitalizing the wrong costs. Routing general overhead, selling costs, or abnormal waste into CIP overstates the asset. Only directly attributable costs and eligible construction-period interest belong there.
- Mishandling capitalized interest. Continuing to capitalize interest after the asset is substantially complete, or during extended construction stoppages, overstates the asset and understates interest expense.
- Confusing CIP with a WIP schedule. Treating a self-constructed fixed asset as if it were a customer contract, or vice versa, misstates both assets and revenue. The two frameworks should never be blended.
- Poor project-level detail. Lumping multiple projects into one CIP balance without subsidiary tracking makes it hard to know which assets are ready to reclassify and which costs belong to which project.
Because CIP touches the balance sheet, the income statement, and taxes at the same time, it rewards disciplined tracking and regular review. Companies undertaking major capital projects benefit from timely internal reporting rather than waiting for year-end to sort out balances, a point covered in our discussion of why annual financial reporting alone is often not enough. Businesses in the construction industry and any company building significant assets for its own use should confirm their CIP policies with a qualified accountant.
Frequently Asked Questions
Is construction in progress a current or non-current asset?
Construction in progress is a non-current (long-term) asset. It is reported within the property, plant, and equipment section of the balance sheet because the asset being built is expected to be used in operations well beyond one year. CIP is not classified as a current asset.
Do you depreciate construction in progress?
No. CIP is not depreciated while the asset is under construction, because the asset is not yet in service. Depreciation begins only after the CIP balance is reclassified to a depreciable fixed-asset account, which happens when the asset is substantially complete and ready for its intended use.
When does CIP get reclassified to a fixed asset?
Under ASC 360, CIP is reclassified when the asset is substantially complete and ready for its intended use. At that point the full accumulated CIP balance is transferred to the appropriate fixed-asset account, and depreciation begins. The trigger is the asset’s readiness, not merely the date the company begins using it.
Can interest be capitalized into construction in progress?
Yes. Under FASB ASC 835-20, interest cost incurred while a qualifying self-constructed asset is being readied for its intended use is capitalized into the asset’s cost. Interest is capitalized only while construction activities are in progress, and the amount capitalized cannot exceed the interest the company actually incurred during the period.
How is CIP different from a contractor’s WIP schedule?
CIP is a fixed-asset treatment for an asset a company builds for its own use, and it accumulates capitalized cost with no revenue involved. A contractor’s WIP schedule is a revenue-recognition tool under ASC 606 that measures earned revenue, billings, and over- or under-billings on customer contracts. They address different questions and should be kept separate.
What costs are capitalized into CIP?
Directly attributable construction costs are capitalized, including direct materials, direct labor, contractor and subcontractor payments, professional fees, permits, site preparation, and installation and testing costs. Eligible construction-period interest is also capitalized. General overhead, selling costs, and abnormal waste are expensed rather than capitalized.
