What it means
A company building a factory, an office fit-out or a large piece of equipment spends money over many months. Rather than charging all that spending to the income statement, it adds the costs to a single account until the asset is ready to be used as intended.
Typical costs include materials, direct labour, contractor invoices, design fees, permits and site preparation. Interest on money borrowed specifically to fund the build can also be added, which is called capitalised borrowing cost.
General overheads that are not clearly linked to the project are normally excluded. No depreciation (the gradual charging of an asset's cost over its life) is recorded while the asset is still under construction, because it is not yet in use.
This means the account can grow for a long time without touching profit, which is why investors sometimes look closely at how large it has become. Once the asset is ready for its intended use, the balance is transferred out of construction in progress into the right category, such as buildings or plant and equipment.
Depreciation then starts from that date, using the asset's useful life and any expected residual value. Delays matter in a business setting because they push back both the benefits and the depreciation.
A project that sits in the account for years may signal cost overruns, stalled work or an asset that should be tested for impairment, meaning a write-down because it is worth less than its cost. Companies also disclose their capital commitments and the size of this account in the notes to the accounts.
Managers use it to track project budgets against actual spending, and lenders watch it to see how much cash is tied up in unfinished assets.
In practice
Real-world examples
Example 1
A hospital group builds a new wing over two years. Each month it records contractor invoices and architect fees in construction in progress, and it only starts depreciating the wing on the day patients are first admitted. The finance team compares the running balance with the approved budget at every board meeting.
Example 2
A shipping company orders a custom vessel from a yard and pays in stages. Each stage payment is added to the account, along with the interest on the loan used to finance them.
Example 3
A software firm fits out new offices with partitions, wiring and furniture. The costs sit in construction in progress until the floor is open for staff, then they move to leasehold improvements. Any furniture bought but not yet installed stays in the account until it is ready for use.
Think of it
Construction in progress tracks costs of building something-accumulating expenses until it's finished.
Formula
Calculation
Closing balance = opening balance + costs incurred in the period (including capitalised borrowing costs)
A manufacturer starts the year with $1,200,000 in construction in progress for a new production line. During the year it adds $400,000 of materials, $250,000 of labour and $50,000 of capitalised interest. Closing balance = $1,200,000 + $400,000 + $250,000 + $50,000 = $1,900,000. When the line enters service, this $1,900,000 is moved to plant and equipment. With a ten-year life and no residual value, annual depreciation is $1,900,000 / 10 = $190,000.Case study
Seen in the real world
Larkspur Bottling is an illustrative, fictional drinks company that began building a second bottling plant. After 18 months, its construction in progress balance had reached $7,800,000 against an approved budget of $7,000,000.
The controller reviewed the account line by line. She found $300,000 of routine maintenance on the old plant had been added to the project by mistake, and that the remaining overrun came from a delayed equipment delivery that kept the site idle.
She moved the maintenance costs to expenses, which reduced profit but corrected the asset, and she reported the delay to the board. In this illustrative case, the lesson is that the account needs regular review, because costs that do not belong in it inflate both assets and profit.
Watch out
Common mistakes
- Starting depreciation while the asset is still being built, when it should only begin once the asset is ready for its intended use.
- Capitalising costs that are not part of the build, such as routine repairs or general administration, which overstates assets and profit.
- Leaving completed projects in the account, which delays depreciation and understates expenses.
Questions
People also ask
Is construction in progress a current or non-current asset?
It is a non-current asset, because the company intends to hold the finished asset for use over several years rather than sell it.
When should interest be added to construction in progress?
When it is borrowing cost that can be directly linked to financing the asset, and only while construction activity is under way. Interest incurred after the asset is ready for use goes to the income statement.
Does construction in progress get tested for impairment?
Yes, like other assets it must be reviewed if there are signs that its recoverable value has fallen below the amount recorded. A cancelled or long-stalled project is a common trigger for that review.
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