Testing the Construction WIP Schedule: Over and Under Billings, Step by Step

The work-in-process schedule is where a contractor's audit is won or lost. Revenue, gross profit, contract assets, contract liabilities and backlog all come off it, and it is produced outside the general ledger, often in a spreadsheet maintained by a controller or project accountant. For the broader picture of revenue under ASC 606 on construction contracts, start with the contractor audit overview. This guide stays on one task: testing the schedule itself.

What the schedule has to prove

Each open job carries a contract price, an estimate of total cost, cost incurred to date, a percent complete, revenue earned, billings, and the difference between revenue and billings. When cost to cost is the measure of progress, percent complete is cost incurred divided by total estimated cost, and revenue earned to date is that percentage times the contract price.

The balance sheet effect follows from the difference. Revenue earned above billings is a contract asset, commonly labelled underbillings. Billings above revenue earned is a contract liability, commonly labelled overbillings. Each contract produces one net position, so an overbilled job is never offset against an underbilled one. See the glossary entry on contract assets and contract liabilities.

Before either balance is recorded, the contractor first asks whether it holds an unconditional right to payment, meaning only the passage of time stands between the work and cash. If it does, the amount is a receivable, even where it has not been billed. RSM's national guidance for contractors, drawing on the AICPA revenue recognition guide, gives the example of a contract with a termination clause that entitles the contractor to payment including profit for work performed to date. Unbilled work on such a contract would likely be reclassified from a contract asset to an unbilled receivable.

Step 1: Establish that the schedule is reliable

Treat the WIP schedule as information produced by the entity. Obtain it in native form, then:

1. Re-foot it and re-perform the percent complete and revenue formulas on every row.
2. Tie contract price, cost to date and billings to the job cost ledger, the billing register and the general ledger by job, not only in total.
3. Roll forward from the prior year: prior revenue earned plus current-year revenue should equal revenue earned to date, job by job.
4. Confirm completeness. Every job with cost or billings in the year, including jobs completed in the year, should appear on the schedule or in the completed-jobs list.

Document these steps on the IPE testing worksheet.

Step 2: Test percent complete

Cost to date is a numerator, and numerators are easy to distort. Trace a sample of cost postings to subcontractor pay applications, vendor invoices and payroll records, and test that each is coded to the correct job. Costs coded to the wrong job move margin between jobs without changing company totals, which is why a total-only tie-out misses it.

Cost-based progress also needs a filter for costs that do not reflect performance. RSM describes the conditions under which a contractor excludes uninstalled materials from the cost-based measure and recognizes revenue equal to their cost, at zero margin. All of the following must be expected at contract inception: the materials are not distinct, a significant period will pass between the customer obtaining control and installation, the cost is significant against total expected cost, and the contractor buys them from a third party without significant involvement in design or manufacture.

RSM's illustration uses a $5 million refurbishment with $4 million of expected cost, including $1.5 million of elevators delivered months before installation. With $500,000 of other cost incurred, progress is 20 percent of the $2.5 million of other cost. Revenue is 20 percent of $3.5 million plus $1.5 million for the elevators, or $2.2 million, against cost of $2.0 million. Counting the elevators as progress would have recognized far more revenue on a job with a small amount of work done. Ask for the receiving log or deliveries listing on every job with large purchases of equipment or fabricated materials.

Step 3: Test the estimate of total cost

A worked example shows why this step carries the audit. These figures are illustrative.

The project manager's estimate of $2.0 million sits behind a $225,000 contract asset. A $300,000 increase in the estimate removes the asset, reduces revenue by $244,565 and moves the job into a contract liability. The cost incurred and the billings never changed.

So the estimate gets evidence beyond inquiry. Read the latest cost-to-complete report for the job. Compare committed subcontract values, open purchase orders and unissued change orders against the remaining budget. Examine costs after year-end and compare them with what the estimate assumed would be spent in the same period. Under AU-C 540, judge the method, data and assumptions, and look for management bias; see estimates and management bias.

Step 4: Test billings and change orders

Billings should agree to executed contracts, schedules of values and approved pay applications. Test the last billings before year-end for pulled-forward invoices, and the first billings after year-end for amounts that belong in the year.

Change orders need a status split. An unpriced change order has defined work and an undetermined price. RSM's guidance treats it as variable consideration, provided it is enforceable, and treats a change in which both scope and price are unapproved or disputed as a claim. A claim is evaluated for enforceability and then as variable consideration, and the contractor should not assume that all of it is constrained. Costs on unapproved work are incurred whether or not the revenue is ever approved, so a growing underbilling on a job with open change orders is a primary lead.

Step 5: Evaluate recoverability and retainage

Test underbillings for recoverability: is the work billable under the contract, is the owner disputing it, and has the contractor billed it since year-end? On retainage, read the contract. Where payment of the retainage depends on something other than the passage of time, such as fulfilment guarantees or milestones, the amount stays a contract asset until the right to payment becomes unconditional. See the retainage glossary entry.

Cut-off on cost is covered by cutoff testing; unrecorded subcontractor invoices are the main way to find understated cost on a job.

PBC items for the WIP schedule

• WIP schedule in native format at year-end and at the prior year-end
• Job cost detail by job, and a billing register
• Executed contracts, schedules of values and change order log with status
• Latest cost-to-complete reports and project manager commentary
• Subcontract commitment report, including retainage payable
• Deliveries listing for large material purchases
• Completed-jobs schedule with final cost and margin
• Subsequent billings and receipts for retainage and underbillings

Red flags

• Percent complete rising while physical progress, as seen on a site visit, lags
• Estimated gross profit unchanged for months on a job with cost overruns
• Underbillings growing on jobs with unapproved change orders
• Round-number estimates that never move
• Jobs missing from the schedule that carry cost in the ledger

Sources

• RSM US LLP, Revenue Recognition for Construction Contractors (November 2025), https://rsmus.com/content/dam/rsm/insights/financial-reporting/1pdf/revenue-recognition-considerations-for-the-construction-industry.pdf
• FASB ASC 606-10-55-21 and 606-10-55-187 through 55-192, Revenue from Contracts with Customers (costs not proportionate to progress; uninstalled materials illustration), as reproduced in the RSM guidance above

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error