Is Construction in Progress (CIP) an Asset Account?

When a company undertakes a construction project, such as building a new facility or developing significant infrastructure, the costs incurred during the construction phase are meticulously tracked. This accounting practice involves a specialized asset account known as Construction in Progress (CIP). Accurately classifying and managing these costs is fundamental for transparent financial reporting to stakeholders.

Understanding Construction in Progress (CIP)

Construction in Progress (CIP) is an accounting term that captures the accumulated costs associated with long-term assets still under construction and not yet ready for their intended use. These assets include projects like commercial buildings, manufacturing plants, or extensive infrastructure. The CIP account serves as a temporary holding place for these expenses during construction.

The costs recorded in a CIP account include direct materials, such as steel and concrete, and direct labor, including wages paid to construction workers. Additionally, overhead expenses tied to the construction project, like permits, architectural fees, and equipment fees, are capitalized into the CIP account. This ensures all expenditures directly contributing to the asset’s creation are tracked and separated from regular operating expenses.

Why CIP Qualifies as an Asset

CIP is considered an asset because it aligns with the definition of an asset in financial accounting. An asset is defined as a resource controlled by an entity as a result of past events, expected to provide future economic benefits. Construction in Progress meets these three core elements: future economic benefits, control by the entity, and being a result of past transactions.

The future economic benefit is met as the incomplete construction project is expected to generate revenue, reduce expenses, or provide other value once it is operational. For instance, a new factory under construction is anticipated to produce goods for sale, while an office building might reduce a company’s rental costs. Even unfinished, the ongoing construction represents a future capacity to contribute to the company’s financial well-being.

Control by the entity is also a characteristic. The company initiating and funding the construction project maintains control over the developing asset, even though it is not yet complete. This control allows the company to direct its use and obtain future benefits. The costs accumulated in the CIP account are a direct result of past transactions, such as purchasing materials or paying for labor.

Managing CIP on Financial Statements

Construction in Progress is presented on a company’s balance sheet, within the Property, Plant, and Equipment (PP&E) section or as a separate non-current asset. This placement reflects that CIP represents a capital investment in long-term assets that are not yet operational. During the construction period, eligible costs are accumulated in the CIP account.

Once the construction project is completed and the asset is ready for its intended use, the total accumulated costs in the CIP account are transferred to the appropriate fixed asset account, such as “Buildings” or “Machinery.” Depreciation begins only after this transfer, when the asset is placed into service. This process ensures accurate financial reporting by recognizing the asset’s cost and its allocation over its useful life.