Finance
Fact Checked

What is Construction in Progress?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

Construction in progress (CIP) is an accounting entry a company may use to account for facilities under construction. As construction proceeds, accounting personnel keep track of it until the end of the construction, when they reclassify the construction in progress as a fixed asset with an assigned value so they can start depreciating it for accounting purposes. Companies that build their own facilities can use this accounting technique, as can construction and development companies, where construction makes up a key part of their profits.

While facilities are under construction, the company may have to disburse a variety of funds including interest on construction loans, wages, insurance, supplies, and other kinds of payments. These are all part of the construction in progress accounting entry. Keeping track of construction costs can allow a company to monitor progress and make sure projects stay within budget, and can allow people to start recording the asset's value as it goes up.

Construction in progress accounting entries can span several years.
Construction in progress accounting entries can span several years.

Without the ability to note construction in progress, companies would have large expenditures, debits from its accounts to pay for the costs of construction, without any earnings. Recording the asset as it grows allows companies to address this problem and balance their books to make them a more accurate reflection of their current financial health. Even partially completed construction has value to the company, and can represent a substantial asset.

An annual report will usually discuss the progress of a construction project.
An annual report will usually discuss the progress of a construction project.

Accountants need to decide on the method they want to use for handling construction costs before the project begins, so they can make consistent and accurate accounting entries. Switching partway through is a violation of accounting standards and practices, as it may create a situation where a company's book value becomes skewed by the accounting adjustments. Companies without regular accounting staff can meet with the accountants they contract with to discuss the options and decide on the best system for their needs.

Construction in progress entries can span several years, as some structures may take a long time to build and outfit with all their supplies. When such entries show up on annual reports, they represent ongoing investments being made by a company. The annual report will usually discuss the progress of the construction, the eventual goal, and how much longer it will take for the facility to be operational, allowing investors to get some context for the numbers they can see in the report. This can be useful for people evaluating prospective investments, as it explains big expenditures a company is making with the intent to generate larger profits in the future with new or improved facilities.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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    • Construction in progress accounting entries can span several years.
      By: ndoeljindoel
      Construction in progress accounting entries can span several years.
    • An annual report will usually discuss the progress of a construction project.
      By: thinglass
      An annual report will usually discuss the progress of a construction project.