How TGG Identified Two WIP Accounting Problems Affecting Construction and Energy-Services Companies
Two companies faced different work-in-progress (WIP) account problems in the same month.
- For a construction subcontractor, pre-construction costs weren’t being updated as expenses accumulated.
- For an energy-services company, an overstated indirect-cost allocation could have inflated reported revenue and net income by roughly $100,000.
TGG Accounting identified both issues and recommended changes to improve each company’s financial reporting accuracy.
When Pre-Construction Costs Remain Unchanged
Work-in-progress and cost-in-excess accounts help construction-related businesses track project costs before they are properly recognized or transferred.
In the construction subcontractor’s case, we noticed that the cost-in-excess account remained unchanged month to month, even though the company was presumably incurring pre-construction expenses regularly.
This static balance raised questions about whether the account accurately reflected ongoing project activity.
As TGG recommended, “Have the account accumulate monthly as costs come in, then relieve it on your normal quarterly cadence, rather than sitting static in between.”
A $100,000 Allocation Discrepancy
At the energy-services company, TGG identified a different concern involving indirect costs allocated to WIP.
The allocation appeared overstated by approximately $100,000, potentially inflating the company’s reported revenue and net income.
The implications extended beyond financial reporting. Depending on the company’s accounting methods and tax treatment, inflated reported income could also affect its tax liability, potentially resulting in taxes on income that had not yet been collected in cash.
We recommended reviewing and adjusting the indirect-cost allocation at least quarterly to prevent discrepancies from accumulating.
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A Quarterly Review Can Catch Problems Earlier
Although the construction subcontractor and energy-services company faced different WIP accounting problems, both cases revealed a similar weakness: inconsistent monitoring of project costs and allocations. Their experiences show how these accounting issues can arise across industries, not just within one company.
For construction subcontractors and energy-services businesses, monthly cost accumulation and quarterly account true-ups can help identify discrepancies before they distort financial reporting.
Establishing a recurring quarterly reminder to review WIP balances and indirect-cost allocations can help prevent discrepancies from going unnoticed.
Through its outsourced CFO services, TGG identified specific accounting concerns and provided recommendations to help both companies maintain more accurate financial records.
What TGG’s Consulting CFO Said
“True-up the indirect cost allocation to WIP at least quarterly. Right now that allocation looks overstated by roughly $100K, which is likely inflating reported revenue and net income — worth flagging since it could mean paying tax on income you haven’t actually collected in cash.”
— Charles Cecil, Consulting CFO, TGG Accounting
