What is Work in Progress (WIP)?
Work in Progress (WIP) is incomplete project work that has been performed but not yet delivered or invoiced. Learn how project-based freelancers track WIP, why it matters for cash flow, and how to manage WIP in your business.
What Is Work in Progress (WIP)?
Work in Progress (WIP) is the value of partially completed work on projects that have been started but not yet finished, delivered, or invoiced. In accounting terms, WIP is an asset representing the cost of labor and materials that have been invested in incomplete projects — it's work that has economic value but hasn't yet generated billable revenue. Schema DefinedTerm: Work in Progress (WIP) — the accounting value of incomplete project work, representing costs incurred and revenue earned on projects that have not yet been delivered, accepted, or invoiced; WIP appears as an asset on the balance sheet until the work is completed and invoiced. WIP is most relevant for freelancers and businesses that work on project-based engagements — consulting, construction, creative services, software development, architecture, engineering, and any long-term deliverable-based work.
Why WIP Exists: The Revenue Recognition Problem
The fundamental question WIP solves: When do you recognize revenue on a long-term project? The naive answer: When the project is complete and you invoice. But this creates distortions: - Year 1: You start a big project. No revenue recognized (project incomplete). Looks like a loss. - Year 2: Project completes. Full revenue recognized. Looks like enormous profit. The better answer: Recognize revenue proportionally as work is performed. This is the percentage-of-completion method — the GAAP standard for long-term contracts. WIP bridges the gap: - As you perform work, the WIP asset grows - Revenue is recognized proportionally - When the project is complete, WIP is zero (all transferred to revenue)
How WIP Works: A Concrete Example
Scenario: A freelance website developer agrees to build a custom web application for $30,000. The project spans 4 months (October through January). Step 1: Project Setup - Total Contract Value: $30,000 - Estimated completion: 4 months - Milestones: 25% design, 50% development, 25% testing/deployment Step 2: October (Month 1) — Design Phase - Work performed: Design completed (25% of total project) - Revenue recognized: $30,000 × 25% = $7,500 - Invoiced: $7,500 (milestone invoice sent) - WIP at end of October: $0 (invoiced = recognized) Step 3: November (Month 2) — Development Phase - Work performed: Development at 50% complete (cumulative 75%) - Revenue recognized: $30,000 × 75% = $22,500 - Cumulative invoiced: $7,500 (only milestone 1 invoiced) - WIP at end of November: $22,500 − $7,500 = $15,000 - (You've done $22,500 of work but only invoiced $7,500) Step 4: December (Month 3) — Development Complete, Testing Begins - Work performed: Development 100% + Testing 20% (cumulative 95%) - Revenue recognized: $30,000 × 95% = $28,500 - Cumulative invoiced: $15,000 (milestones 1 and 2) - WIP at end of December: $28,500 − $15,000 = $13,500 Step 5: January (Month 4) — Project Complete - Work performed: 100% complete - Revenue recognized: $30,000 × 100% = $30,000 - Invoiced: Final $15,000 (milestone 3) - WIP at end of January: $30,000 − $30,000 = $0 - Project closed, all revenue recognized
WIP and the Balance Sheet
WIP appears on your balance sheet as a current asset (assuming projects will complete within one year): `` BALANCE SHEET (as of December 31) Current Assets: Cash $12,000 Accounts Receivable $8,000 Work in Progress $28,500 ← WIP Prepaid Expenses $2,000 Total Current Assets $50,500 `` WIP is an asset because: - You've incurred costs (labor, expenses) to create value - The work has been performed and accepted (so it has economic value) - The client will pay for it (so it's expected to convert to cash) - It's not yet billed (so it's not yet AR)
WIP Calculation: The Formula
`` WIP = Contract Value × Percentage Complete − Revenue Already Recognized ` Or equivalently: ` WIP = Costs Incurred on Project − Amount Billed to Date `` Both approaches produce the same result. Example Using Cost-Based WIP: Project: Marketing Strategy Report — $15,000 fixed fee | Month | Costs Incurred | % of Total Costs | Revenue Recognized | Invoiced | WIP | |---|---|---|---|---|---| | Month 1 | $1,500 | 30% | $4,500 | $3,000 | $1,500 | | Month 2 | $2,000 | 40% | $6,000 | $3,000 | $3,000 | | Month 3 | $1,500 | 30% | $4,500 | $9,000 | $0 |
Percentage-of-Completion: Input vs. Output Methods
Two approaches to measuring percentage complete: Input Measures (Cost-to-Cost Method) Percentage = Costs Incurred / Total Estimated Costs This is the most common and reliable method. As long as you can estimate total project costs accurately, this method works. Example: You've spent $15,000 on a project estimated to cost $50,000 total. - Percentage complete = $15,000 / $50,000 = 30% - Revenue recognized = 30% × Contract Value Output Measures Percentage = Deliverables Completed / Total Deliverables This requires clearly defined milestones or deliverables. Useful when input costs don't accurately reflect progress (e.g., design work where effort doesn't correlate linearly with value delivered). Example: 3 milestones, milestone 1 complete. - Percentage complete = 1/3 = 33% - Revenue recognized = 33% × Contract Value
WIP and Cash Flow: The Hidden Risk
WIP creates a timing mismatch: you're spending cash (or accruing costs) as you do work, but you're not receiving cash until you invoice. For large projects with milestones far apart, WIP can become substantial — creating working capital strain. Example of WIP cash flow risk: - $100,000 software development project - 6-month timeline - No milestone invoicing until completion - Developer works full-time for 6 months, pays themselves monthly - In month 6, they finally invoice and receive $100,000 - But they've been funding 6 months of work without income This is why project-based freelancers often negotiate: - Upfront deposits (10-25% at project start) - Milestone-based invoicing (every 2-4 weeks) - Monthly invoicing for time-and-materials projects
WIP for Time-and-Materials vs. Fixed-Price Projects
Fixed-Price Projects - Total revenue is fixed - WIP = Revenue earned (based on % complete) − Amount billed - Risk: If project goes over budget, WIP can exceed the invoiced amount (you're underwater) Time-and-Materials Projects - Revenue accumulates as work is performed - WIP is minimal if you invoice frequently (weekly or bi-weekly) - Risk: Scope creep can increase costs without corresponding revenue increases
WIP Red Flags: When WIP Signals Problems
WIP Growing Faster Than Revenue If WIP is increasing while revenue stays flat, either: - Projects are taking longer than estimated - You're underpricing and under-invoicing relative to work done - Clients are delaying acceptance of completed milestones WIP Exceeding Accounts Receivable Large WIP relative to AR can signal that clients owe you more for in-progress work than for completed, invoiced work. This is common in milestone-based billing — it's not necessarily a problem, but it means your cash flow depends on milestone acceptance. Negative WIP If revenue recognized exceeds percentage complete, you have negative WIP — which means you've invoiced more than the work performed. This is generally fine (you've collected cash for future work) but can be a warning sign of aggressive revenue recognition.
Managing WIP Effectively
Tip 1: Invoice Frequently The shorter your invoicing cycle, the lower your WIP. Monthly invoicing (or milestone-based billing) keeps WIP manageable. Tip 2: Require Deposits Upfront deposits (10-25%) reduce WIP at project start. A $5,000 deposit on a $20,000 project immediately reduces your working capital exposure. Tip 3: Track Project Costs Actively Don't let WIP accumulate without monitoring. Review WIP monthly for long projects. Tip 4: Set Clear Milestones Well-defined milestones tied to deliverables simplify WIP calculation and reduce disputes about percentage complete. Tip 5: Use Project Management Software Tools that track time, tasks, and milestones help you estimate % complete accurately.
How Eonebill Helps
Eonebill's project tracking and invoicing features help project-based freelancers manage WIP by automating milestone tracking, calculating percentage complete, and generating invoices at the right moments. Instead of managing complex spreadsheets, Eonebill keeps your project progress and cash flow aligned. Try Eonebill Free → | View Pricing →
Related Terms
- Percentage of Completion — Revenue recognition for long-term projects - Accounts Receivable — Invoiced but unpaid amounts - Contractor Invoice — Invoicing for project-based work - Cash Flow — The cash management challenge WIP creates - Milestone Billing — Invoicing tied to project stages
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