What Is Construction in Progress (CIP) Accounting?

Construction in Progress (CIP) accounting tracks costs for assets a company builds or develops for its own long-term operational use. This approach applies to significant investments like new facilities, large machinery, or internal software development projects. CIP accounting accumulates all expenditures related to bringing these assets into operational readiness.

Defining Construction in Progress

Companies use Construction in Progress (CIP) accounting to capitalize costs for assets under construction, rather than expensing them immediately. CIP is a temporary asset account that accumulates expenditures during the building phase of a long-term asset. Assets in the CIP account are not yet in service and do not undergo depreciation.

The objective of CIP accounting is to gather all costs directly related to preparing an asset for its intended use, treating them as part of the asset’s total cost. This tracking helps businesses maintain accurate financial records and assess project budgets.

Costs Included in CIP

The Construction in Progress account accumulates costs incurred throughout the asset’s construction period. These costs are broadly categorized into direct and indirect expenses. Only expenditures made during the construction phase and directly attributable to the asset’s construction are included.

Direct costs are expenditures directly traceable to the construction project. Examples include raw materials such as steel, concrete, and lumber. Wages paid to construction workers, along with engineering and architectural fees, are considered direct costs.

Indirect costs, often referred to as overhead, are expenses that support the construction project but are not directly tied to a specific unit of work. These can include utilities consumed at the construction site, the cost of temporary facilities, and indirect labor such as project management salaries or security personnel. These costs are allocated to the CIP account because they are essential for the overall project completion.

Interest costs can also be capitalized into the CIP account under specific circumstances. For funds borrowed to finance the construction of a qualifying asset, the interest incurred during the construction period can be added to the asset’s cost. This capitalization is governed by accounting standards.

CIP on Financial Statements

Construction in Progress (CIP) is presented on a company’s Balance Sheet as a non-current asset, under the Property, Plant, and Equipment (PP&E) section. This reflects the company’s investment in long-term assets that are not yet complete or operational.

While an asset remains in the CIP account, it is not subject to depreciation. Depreciation begins when the asset is finished and ready for its intended use. The accumulated costs in the CIP account represent the total expenditure on the asset up to a given point. Changes in CIP balances are reflected in the cash flow statement under investing activities, as they represent capital expenditures.

Completing a CIP Project

The final stage of Construction in Progress (CIP) accounting occurs when a project is completed and the asset becomes ready for its intended use. At this point, the total accumulated costs from the CIP account are reclassified. This reclassification involves moving the balance from the temporary CIP account to the appropriate permanent fixed asset account on the balance sheet, such as “Buildings” or “Machinery and Equipment.”

This transfer signifies that the asset is now “placed in service,” meaning it is operational and contributing to the company’s activities. Upon this reclassification, the asset begins to undergo depreciation. The depreciation process systematically allocates the asset’s cost over its estimated useful life. The accounting entry for this transfer involves debiting the specific fixed asset account and crediting the CIP account, thereby clearing the CIP balance for that particular project. This transition ensures that the company’s financial records accurately reflect the operational status and depreciable value of its long-term assets.