What is CIP Accounting? Explained for Contractors and Project-Based Businesses  

Construction-in-progress (CIP) accounting tracks the costs associated with ongoing construction projects. It is crucial for ensuring accurate financial reporting for construction companies, especially those managing long-term, multi-phase developments.  

CIP is a specific accounting approach for property, plant, and equipment assets in the construction phase that is not yet ready for use.   

Rather than being recorded as a current expense, these costs are recorded on the balance sheet as a long-term asset under the construction-in-progress (CIP) account.  

Businesses apply construction-in-progress accounting when constructing a building, expanding a facility, or assembling new machinery. This treatment distinguishes construction costs from operational expenses, allowing project stakeholders to view investment amounts before completion.  

For example, a contractor building a bridge over 18 months wouldn’t capitalize on the full cost at the start. Instead, each project cost is entered as a journal entry in the CIP account.   

Once the project is finished, the total CIP balance is transferred to the appropriate fixed asset accounts, and depreciation begins.    

Why is CIP Accounting Important for Your Business?   

Here’s why CIP Accounting is beneficial for your business:   

Better Financial Control  

Construction-in-progress accounting offers project managers a structured way to track costs associated with construction projects during the construction phase.   

By isolating these expenditures from routine operating expenses, CIP enhances visibility and control over project cost allocations, ensuring they are reflected correctly as long-term assets on the balance sheet. 

Transparency for Investors and Auditors  

Accurate financial reports are critical for maintaining trust with stakeholders. CIP accounting provides transparency by detailing the capital invested in CIP before assets are operational.   

This clarity is essential for auditors and investors who rely on clear, GAAP-compliant records to evaluate a company’s financial position and current commitments. It also supports proper journal entries for both internal reporting and external audits.  

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Effective Cost Control and Budgeting  

CIP allows construction companies and finance teams to keep a close eye on rising construction costs, enabling early detection of budget overruns.   

How to Record CIP in Accounting? 

When your accounting team or outsourced CFO manages CIP, they follow a structured process to ensure accurate financial reporting and compliance. CIP accounting plays a vital role in keeping your financial statements clean while your assets are still under development.   

Here’s how the process works:  

Identify CIP Expenses  

Start by identifying all construction costs directly related to the project’s construction phase. These may include:  

• Building materials like concrete, steel, or lumber  

• Labor and subcontractor fees  

• Permits, licenses, and inspection fees  

• Equipment usage and installation charges  

• Interest on construction loans  

These are recorded as long-term assets under the CIP category on your balance sheet. This approach ensures you properly track costs related to a specific build until the construction is complete and the asset is ready for use.  

Document and Record Each Expense  

You should have organized documentation—receipts, invoices, and vendor statements. These records are essential for creating an auditable trail of each project cost, helping maintain transparency and satisfy GAAP or IFRS standards.  

Record Expenses in the CIP Account  

For each qualifying expense, your journal entries should debit the Construction in Progress account (a fixed asset account) and credit Accounts Payable (a liability). Here’s an example:  

• If you receive a shipment worth $20,000:  

• Construction in Progress (Debit): +$20,000  

• Accounts Payable (Credit): -$20,000  

The CIP account accumulates costs until the asset is moved from work-in-progress accounting to a permanent fixed asset category.   

Transfer CIP to Fixed Assets Upon Completion  

Once the construction project is finalized, the accumulated balance in the construction in progress account must be transferred to a fixed asset account, which includes buildings or property, plants, and equipment. This step marks the transition from the construction phase to operational use.  

Your accounting team will make a journal entry that:  

• Debits the appropriate fixed asset account  

• Credits the CIP account to clear the balance  

This move ensures that the asset is now classified correctly on the balance sheet and is subject to depreciation. Recording this transfer also improves the company’s financial position, as the asset now contributes to the value of long-term infrastructure instead of being recorded as work-in-progress accounting.   

Example of CIP Accounting  

Let’s illustrate CIP accounting with an example:  

Batcave Construction Company specializes in large-scale infrastructure projects. In January, the company began building a $5 million high-security underground parking facility for a municipal client.   

The project was expected to span 18 months and fall under construction in progress accounting.  

Month 1: Initial Costs Incurred  

Batcave Construction incurred the following construction costs in the first month:  

• Excavation equipment rental: $40,000  

• Steel materials: $120,000  

• Labor and subcontractors: $85,000  

• Permits and inspections: $5,000  

All of these qualify as project cost items directly tied to the construction phase.  

CIP Journal Entry  

• Construction in Progress (Asset): $250,000    

• Accounts Payable: $250,000  

The journal entry records the expenses in the CIP account on the balance sheet, reflecting them as a long-term asset under property, plant, and equipment.  

These expenses are not recorded as costs on the income statement because the asset is still under development and hasn’t been placed into service.  

Month 9: Mid-Project Review  

By month nine, Batcave had accumulated $3.2 million in construction in progress. Their accounting team used this information to produce updated financial statements for their investors, providing transparency on the work-in-progress accounting status. This helped them track costs, manage budgeting, and secure additional financing.  

Month 18: Project Completion  

Upon completion, the entire CIP balance of $5 million was transferred to the fixed asset account, Underground Facilities.  

Final Journal Entry:  

• Underground Facilities: $5,000,000    

• Construction in Progress: $5,000,000  

This entry removes the balance from the CIP account and reclassifies it as a depreciable fixed asset. Depreciation will now begin in the following accounting period.  

FAQs  

What is the difference between CIP and WIP accounting?  

CIP (Construction in Progress) and WIP (Work in Progress) are used to track incomplete projects, but they apply to different industries.   

CIP accounting is used primarily by construction companies to track the costs associated with long-term fixed-asset projects during the construction phase.   

On the other hand, WIP accounting is more commonly used in manufacturing to track inventory items that are partially completed.  

Is CIP a capital expenditure?  

Yes, CIP is considered a capital expenditure. It includes project costs like materials, labor, and subcontractor fees for building or assembling a long-term asset.   

These costs are not immediately expensed but are treated as an asset on the balance sheet until the project is complete and the asset is placed into service.  

Is CIP a debit?  

CIP is recorded as a debit in the construction-in-progress account, an asset account under property, plant, and equipment.   

Each time a company incurs a construction-related cost, the CIP account is debited, and the corresponding credit is made to accounts payable or cash, depending on the transaction.  

How to depreciate CIP?  

You do not depreciate CIP while the project is ongoing. Once the construction is complete and the asset is placed into service, the total balance in the CIP account is transferred to a fixed asset account.  

Depreciation then begins based on the asset’s estimated useful life using straight-line or declining balance methods, depending on company policy and accounting standards.