A contractor’s operating account shows $250,000 in mid-October. The owner reads that as a strong quarter and starts thinking about a distribution. The work-in-progress schedule tells a different story. Roughly $180,000 of that balance is overbilling on two jobs, which is cash collected for work not yet performed. Another $60,000 is retainage that has not actually been released. The profit genuinely available is a fraction of what the bank shows.
That gap is the most expensive misunderstanding in construction finance. A bank balance reports what has been collected. It says nothing about what has been earned. On a job running eight months, those two numbers can diverge by six figures without anything going wrong on site.
This blog covers what a WIP schedule actually measures, why overbillings and underbillings change the meaning of every number above them, what a surety underwriter looks for, and one Texas franchise tax provision that rewards contractors who cost their jobs properly.
Construction billing rarely tracks construction progress. Mobilization is billed up front. Progress draws follow a schedule of values negotiated before the first shovel moved. Material is often billed on delivery rather than installation. The result is that early in most jobs, a contractor has collected more than the work performed justifies.
That difference is an overbilling, and it is a liability. The cash is in the account, but the obligation to perform the work has not gone anywhere.
An overbilled job flatters the bank balance while hiding an obligation to perform work that has already been paid for.
The WIP schedule is what surfaces this. For each open job it compares costs incurred to date against total estimated cost, producing a percentage complete. Applying that percentage to the contract value gives revenue earned to date. Compare earned revenue to amounts billed, and the job is either overbilled or underbilled.
A contractor who distributes against an overbilled position is spending money the jobs still need. When those jobs move into their back half, billing slows while costs continue, and the cash reverses. This is the same distinction covered in Cash Flow Isn’t Profit: Why You Need Both to Grow, sharpened by the fact that construction contracts span reporting periods.
Underbillings Are Working Capital You Have Already Earned
The reverse position is less discussed and often more costly. An underbilled job is one where the work performed exceeds the amount billed. The contractor has earned revenue and is financing it out of pocket.
Underbillings usually trace to a small number of causes:
Each of these is recoverable, but only if someone is looking. A monthly WIP review that flags underbilled jobs converts the schedule from a reporting exercise into a collections tool. For the broader discipline around getting paid on time, see Accounts Receivable Management: How to Get Paid Faster Without Losing Clients.
Retainage deserves its own line. Most Texas construction contracts allow the owner to withhold a percentage of each payment until the project is complete and accepted. That money has been earned and reported as revenue, but it is not collectible yet, and it can sit for months after a crew has left the site. Contractors who track retainage inside general accounts receivable consistently overstate what is available to them.
Tracking it as a separate receivable, aged by expected release date rather than invoice date, is the only way to see the real collection picture. On a contractor running several jobs at once, retainage alone can represent a meaningful share of annual profit sitting outside the operating account.
Bonding capacity is not set by revenue. It is set by what the financial statements demonstrate about a contractor’s ability to finish work profitably, and the WIP schedule carries most of that weight.
Underwriters look for specific things:
A contractor who produces a clean, reconciled WIP schedule every month, rather than assembling one under pressure at year-end, is in a materially stronger position when capacity is being reviewed.
Everything above depends on one input: accurate cost to date, by job. Construction job costing is what produces that number, and it is where most systems break down.
Three failures account for the majority of unreliable schedules.
The remedy is a monthly close discipline rather than better software alone: costs reconciled to the ledger, billings posted, and estimates to complete refreshed with project manager input before anyone acts on the numbers. The estimate-to-complete step is the one most often skipped, because it requires a conversation with the people running the work rather than a report pulled from a system. It is also the step that determines whether the percentage complete means anything.
A useful test:
if a job is discovered to have lost money only at closeout, the accounting system is producing history rather than management information. Cost overruns that surface at 40% complete can still be corrected through scope conversations, change orders, or crew reallocation. The same overrun discovered at final billing is simply a loss.
Here is where Texas contractors have an advantage that national guidance rarely mentions.
The Texas franchise tax is imposed on taxable margin rather than income, and one way to compute margin is total revenue less cost of goods sold. Service businesses generally have no COGS subtraction. Construction is treated differently. Under Texas Tax Code Section 171.1012, an entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance of real property is considered an owner of that labor and material, and may include those costs in its COGS computation.
The Comptroller confirms that a contractor’s payments to subcontractors for real property work may be included as well.
The subtraction is only as good as the job cost records supporting it.
Two points are worth knowing. Texas COGS is defined separately from federal reporting, so allowable costs must be expressly listed in the statute rather than carried over from the federal return. And because the franchise tax uses a fixed conformity date, federal bonus depreciation cannot be included in the Texas COGS calculation.
A contractor with clean job-level costing can substantiate the subtraction. A contractor whose costs sit in undifferentiated overhead accounts often cannot, and defaults to the less favorable margin calculation without realizing there was a choice.
For federal purposes, Internal Revenue Code Section 460 requires the percentage-of-completion method for long-term contracts, meaning any construction contract not completed within the tax year it begins. Under that method, taxable income is tied directly to project estimates, which is precisely why estimating discipline and job costing become tax issues rather than purely operational ones.
There are exceptions. The small construction contract exception applies where the contract is expected to be completed within two years and the contractor meets the gross receipts test. For tax years beginning in 2026, that threshold is average annual gross receipts of $32 million or less over the preceding three years. Home construction contracts are exempt regardless of contractor size.
Contractors who qualify may be able to use the completed contract method or another permitted method, which changes when income is recognized and can meaningfully shift a tax year. Method changes generally require IRS consent, so this is a decision to make deliberately and in advance rather than at filing.
A WIP schedule is not a compliance document produced once a year for the tax return. It is the report that tells a contractor which jobs are actually making money, how much of the bank balance is genuinely available, and whether the next bid can be bonded.
DWG CPA works with contractors across the greater Houston area on job costing structure, monthly WIP preparation, bonding-ready financial statements, and the accounting method decisions that follow from them.
That work is delivered through small business accounting engagements for contractors who need reliable monthly numbers, and through Virtual CFO services for those who need forecasting, bonding strategy, and margin analysis alongside them.
To review what your current WIP schedule is telling you, schedule a discovery call at dwg.cpa.
If you’re building something important and need a trusted financial partner to grow with you – we’d love to hear from you.
DWG CPA PLLC is a Texas-based accounting firm serving businesses and nonprofits since 2005. We specialize in virtual accounting, tax strategies, and personalized financial guidance across industries like healthcare, construction, real estate, and nonprofits.
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