Mastering Work In Progress:
Key Steps To Accurate Calculation
How to calculate work in progress starts with a core formula: Ending WIP = Beginning WIP + Manufacturing (or Project) Costs – Cost of Goods Manufactured (or Costs of Completed Work), supported by detailed tracking of direct materials, direct labor, and allocated overhead. This gives you the value of partially completed work at period-end and becomes the basis for accurate revenue recognition, margin analysis, and cash-flow planning.
As a founder who has spent over two decades cleaning up bad WIP for manufacturers, contractors, and professional service firms, I can tell you most “mystery margin leaks” trace back to inconsistent WIP calculation. In this article, I’ll walk you through the exact formulas, methods, and implementation steps my team uses at Complete Controller to turn WIP from a guessing game into a reliable decision-making tool that drives profitability and cash flow stability.
How do you master work in progress and get WIP calculation right?
- Accurate WIP calculation means applying a clear formula, choosing the right percent-complete method, and backing it with disciplined cost tracking and reconciliation.
- In manufacturing, you calculate WIP with a roll-forward: beginning WIP plus current-period manufacturing costs minus the cost of goods manufactured.
- In construction and long-term projects, you calculate WIP from accumulated costs, then apply a percentage-of-completion method to determine earned revenue and over/under-billings.
- The “right” method depends on your business model: units-complete, cost-to-complete, and percent-cost-incurred each have strengths and risks.
- To master WIP, you need more than a formula: robust project/job-costing, regular updates, cross-team visibility, and controls that tie WIP back to physical reality.
Understanding Work in Progress: What You’re Really Calculating
Work in progress (WIP) represents partially completed goods or projects that are between raw materials (or initial planning) and finished goods or completed contracts.
Key definitions every owner should know
- Work in Progress (WIP) / Work in Process
The value of products or projects that have started but are not yet finished, including materials, labor, and a share of overhead.
- Manufacturing Costs / Project Costs
Direct materials, direct labor, and allocated overhead incurred during the period.
- Cost of Goods Manufactured (COGM) / Cost of Completed Work
Total costs of items or projects that moved out of WIP and into finished goods or completed contracts during the period.
- WIP vs. Construction in Progress
In construction, WIP often uses specific accounts like Construction in Progress and Billings on Construction in Progress to show over/under-billings on the balance sheet.
Core Formula: How to Calculate Work in Progress Step by Step
At the heart of every WIP schedule is a simple roll-forward formula.
The standard WIP inventory formula
Ending WIP = Beginning WIP + Manufacturing (or Production) Costs – Cost of Goods Manufactured (COGM)
Where:
- Beginning WIP = last period’s ending WIP balance.
- Manufacturing/Production Costs = raw materials + direct labor + manufacturing overhead added this period.
- COGM = cost of all units completed and transferred out of WIP this period.
Breaking down the inputs (manufacturing focus)
- Direct materials
All raw materials that physically become part of the product.
- Direct labor
Wages and benefits of workers directly tied to production.
- Manufacturing/allocated overhead
Factory rent, utilities, depreciation, indirect labor, machine setup, etc., allocated based on an overhead rate.
WIP calculation example (simple manufacturing)
- Beginning WIP: $20M
- Manufacturing costs: $250M
- COGM: $245M
Ending WIP = 20M + 250M – 245M = $25M
Percentage-of-Completion: How to Calculate Work in Progress for Projects & Construction
For long-term contracts, the real question goes beyond calculating your WIP balance—it’s about determining how much revenue you’ve truly earned so far.
Core WIP and percent-complete formulas (project-based)
- WIP (Costs Incurred to Date)
WIP = Direct Materials + Direct Labor + Allocated Overhead
- Percentage of work completed
Percent Complete = WIP ÷ Total Estimated Costs
- Earned revenue
Earned Revenue = Percent Complete × Total Contract Value
Example: Construction project WIP and revenue
You sign a $2.5M contract with estimated total costs of $2.0M.
End of Year 1:
- Direct materials: $350,000
- Direct labor: $250,000
- Allocated overhead: $100,000
WIP = 350,000 + 250,000 + 100,000 = $700,000
Calculate percent completePercent Complete = 700,000 ÷ 2,000,000 = 35%
Calculate earned revenueEarned Revenue = 35% × 2,500,000 = $875,000
Compare billings to work performedIf billings to date are $1,000,000, you are overbilled by $125,000 (billings exceed earned revenue).
The accounting view: WIP and billings
- Construction in Progress (asset): accumulates costs and gross profit (value of work done).
- Billings on Construction in Progress (contra-asset): accumulates what you’ve invoiced.
- The net shows overbilling (credit) or underbilling (debit) on the balance sheet.
Choosing the Right Method: Percent-Complete Options and When to Use Them
Not all WIP calculation methods are created equal; your method must match your operations.
Percent-complete methods used in practice
Percent of cost incurred
- Formula: Percent Complete = Costs Incurred ÷ Total Estimated Costs.
- Best for: Projects where costs correlate closely with progress (many construction and consulting engagements).
- Risk: Overstated progress if early phases are cost-heavy but don’t reflect true completion.
Units-of-delivery / units-completed method
- Formula: Percent Complete = Units Completed ÷ Total Budgeted Units.
- Best for: High-volume, standardized products or repetitive project units.
- Risk: Not ideal when units vary significantly in complexity or value.
Cost-to-complete (cost-to-finish) method
- Formula: Revised Estimated Cost = Costs Incurred + Estimated Cost to Complete.
- Best for: Labor-intensive or highly variable projects where remaining effort can be reliably estimated.
- Risk: Requires accurate forecasting of remaining costs—poor estimates can distort WIP.
Weighted average / hybrid approaches
Used in process manufacturing to smooth cost fluctuations and normalize inventory values across periods.
Owner-level decision guide
- If you have long-cycle construction or engineering: prioritize percent-of-cost or cost-to-complete with robust job-costing.
- If you run high-volume manufacturing: stick with the WIP roll-forward formula plus units-completed analysis.
- If you manage professional services or consulting: integrate time-and-materials tracking with a percent-complete framework.
Turning Formulas into a System: How to Implement Reliable WIP in Your Business
Formulas alone won’t save you; the real leverage is in your process. At Complete Controller, we follow a consistent implementation roadmap when we’re brought in to fix WIP.
Map your production or project flow
Document each stage from raw materials/intake to finished goods or completed contracts. Define where an item or project enters WIP and where it exits into finished goods or revenue.
Build a job-costing and tracking foundation
- Time and materials tracking
Track hours and materials against specific jobs or work orders using software or structured spreadsheets.
- Job or project codes
Assign unique identifiers so every dollar of material, labor, and overhead can be traced to a job.
- Overhead allocation method
Decide on a driver (labor hours, machine hours, direct labor cost) and apply a consistent overhead rate. Holding excess WIP inventory increases operating costs by 15–30% annually due to storage requirements, risk of damage, and tied-up capital that could be used elsewhere.
Create a WIP schedule cadence
Set a regular update frequency: weekly, bi-weekly, or monthly, depending on project length and risk. For each job or product line, track:
- Contract or standard value
- Total estimated cost
- Costs incurred to date
- Percent complete
- Earned revenue (for projects)
- Over/under-billings or WIP inventory balance
When properly implemented, WIP limits using Kanban methodology can increase team throughput by up to 40% while simultaneously reducing delivery time by up to 60%. Dell Technologies pioneered a direct-to-customer business model combined with Just-In-Time (JIT) inventory principles, resulting in significantly lower WIP and carrying costs while preserving flexibility for high customization.
Reconcile WIP to physical reality
Compare WIP balances to:
- Physical counts on the floor or at job sites
- Production reports and project milestone reports
- Prior-period estimates vs. actual costs to identify bias or drift
Case Study: How Tight WIP Controls Turned Around a Struggling Contractor
The AICPA highlights that a strong WIP schedule for construction should include contract price, estimated total project cost, and costs and requisitions (billings) to date. One mid-sized contractor discovered through disciplined WIP analysis that several projects showing “profit” on paper were actually underbilled and behind schedule, putting cash flow and bonding capacity at risk.
By tightening their WIP schedule—re-estimating total costs regularly, aligning contract price with realistic budgets, and comparing costs to requisitions—they were able to:
- Spot and address chronic underbilling, improving cash flow.
- Adjust change orders earlier to prevent margin erosion.
- Provide clearer, more credible reports to banks and sureties, strengthening their financial position.
A bearing manufacturer implemented the Toyota Production System with Kanban methodology and achieved measurable WIP reductions: 15% reduction for the JC 8037 Outer Ring component, 12% for the JC 8037 Inner Ring, and 6.7% for the JC 8038/33B variety. Beyond inventory reduction, the company achieved zero machine idle time due to lack of material—a dramatic improvement in resource utilization that directly protected margins.
Key takeaway: For project-based businesses, WIP schedules are not just accounting reports; they are early-warning systems that surface profitability and cash issues long before they hit the income statement.
Where Most Businesses Go Wrong with Work in Progress (and How to Avoid It)
Many of the worst WIP problems we see are not technical—they’re operational and behavioral.
Common WIP pitfalls
- Using “percent of budget spent” as percent complete
Assuming 60% of the budget spent means 60% complete is a classic error; materials and early mobilization can heavily front-load costs.
- Infrequent WIP updates
Updating WIP only at year-end leads to surprises, distorted margins, and bad bidding decisions.
- Weak link between field and accounting
If supervisors don’t provide reliable progress estimates, accounting is forced to guess, undermining WIP accuracy. Industry standard indicates that if a contractor’s underbilling reaches 10% of their total assets, it is considered high compared to standard benchmarks.
- No overhead allocation discipline
Under- or over-allocating overhead distorts job profitability and WIP valuations.
Practical fixes from the founder’s seat
- Require field sign-off on percent-complete estimates at each WIP cycle.
- Standardize checkpoints (e.g., 25%, 50%, 75%, substantial completion) with clear, objective criteria.
- Implement training so project managers understand how their updates directly affect financials and bonuses.
From Numbers to Decisions: Using WIP to Drive Strategy, Pricing, and Cash Flow
Once you trust your WIP numbers, they become a strategic asset—not just a reporting requirement.
Strategic uses of accurate WIP
- Bid and pricing improvement
Comparing estimated vs. actual costs across jobs highlights where your bids are too aggressive or overhead recovery is too low.
- Cash-flow planning
Over/under-billing analysis reveals upcoming cash gaps long before they appear in the bank account.
- Capacity and scheduling
WIP aging shows which jobs or product lines routinely get stuck, helping you prioritize staffing and process improvements.
- Bank and investor confidence
Clean, defensible WIP schedules demonstrate control and predictability—key for credit, bonding, and potential exits.
Conclusion: How I Advise Owners to Master WIP, Not Fear It
From my vantage point at Complete Controller, the businesses that thrive don’t treat WIP as an annual chore; they treat it as a monthly management tool. I recommend you start with one product line or project portfolio, implement the formulas and cadence we’ve covered, and insist on field–accounting alignment around percent complete and costs. Once you can trust those numbers, you can price better, plan cash with confidence, and spot trouble months in advance.
If you’re ready to turn WIP from a black box into a strategic advantage, my team and I can help you design and run a WIP process that fits your systems and industry. Visit CompleteController.com to learn how we support manufacturers, contractors, and service firms with accurate, real-time financials.
Frequently Asked Questions About How to Calculate Work in Progress
What is the formula for calculating work in progress?
The standard formula is Ending WIP = Beginning WIP + Manufacturing (or Production) Costs – Cost of Goods Manufactured (COGM). In project-based businesses, WIP is often calculated as total costs incurred to date (materials, labor, overhead) and then used to determine percent complete and earned revenue.
How do you calculate WIP in construction?
In construction, you add direct materials, direct labor, and allocated overhead to get costs incurred to date (WIP). Divide costs incurred by total estimated costs to get percent complete. Multiply percent complete by contract value to get earned revenue, then compare that to billings to find over/under-billings.
How do you calculate percentage of completion?
A common method is Percent Complete = Costs Incurred to Date ÷ Total Estimated Costs. Alternatives include units-based methods (units completed ÷ total units) and cost-to-complete (revised total cost based on remaining cost estimates).
Is work in progress an asset or an expense?
Work in progress is recorded as a current asset on the balance sheet, representing the value of partially completed goods or projects. Related costs are expensed to cost of goods sold or cost of services when the goods are finished or the project work is recognized as revenue.
How often should WIP be calculated?
Best practice is to calculate WIP at least monthly, and more frequently (weekly or bi-weekly) for large, risky, or cash-sensitive projects. Year-end-only WIP calculations are insufficient for managing profitability and cash flow in real time.
Sources
- Brazer, Jennifer. “Calculating Work in Process.” Complete Controller.
- “WIP Accounting: How to Calculate Work in Progress (and Why).” Paro.
- “Work in Progress (WIP) | Inventory Formula + Calculator.” Wall Street Prep.
- “The Complete Guide to Work in Progress (WIP).” IECI.
- “What Is Work in Process Inventory and How to Calculate It.” Ware2Go.
- “Work in Progress Calculations (WIP) for Construction Businesses.” YouTube.
- “WIP Methods for Calculating and Recording Project Progress.” Microsoft Learn: Dynamics 365 Business Central.
- “WIP Schedules: Blueprints for Solid Construction Accounting.” AICPA-CIMA.
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Brittany McMillen
Brittany McMillen