Ksenia Kartamysheva Work in progress (WIP) in professional services is a current asset on the balance sheet [2] that represents the cost of labor, expenses, and overhead incurred on active client engagements before those costs are invoiced or recognized as revenue. It is an accounting construct, not a physical inventory, and it exists because services firms deliver value before they bill for it. For consulting firms, IT services providers, and other project-based businesses, WIP sits at the intersection of project delivery and financial reporting. The SPI Research 2026 Professional Services Maturity Benchmark, based on data from 509 organizations employing over 245,000 consultants, reports that median billable utilization across the industry was 66.4% in 2025, putting direct pressure on WIP accumulation and billing cycles [1]. WIP is governed by ASC 606 under U.S. GAAP, which requires revenue recognition when a performance obligation is satisfied, not when an invoice is issued [3]. This timing difference creates WIP on every active engagement. This article explains how WIP is defined in a services context, how it differs from manufacturing WIP, how ASC 606 shapes WIP accounting, how to build and maintain a WIP schedule, and how PSA software automates the calculations that most mid-size firms still handle in spreadsheets.
WIP in professional services vs. manufacturing WIP
Accountants distinguish between “work in progress” and “work in process.” Work in process describes partially completed goods moving through a manufacturing operation, raw materials that have entered production but have not yet become finished products [2]. Work in progress describes projects that extend beyond a single production cycle, typically tied to contracts and ongoing client work rather than factory inventory.
Professional services firms deal almost exclusively with work in progress. A six-month consulting engagement, a multi-phase software implementation, and an annual audit contract all fit this category. Each project has its own scope, timeline, and billing structure, which makes WIP tracking more complex than in manufacturing.
In manufacturing, WIP is physical: partially assembled products on a factory floor. In professional services, WIP is invisible, it is the hours your consultants logged last week that have not been billed yet. It is the report your team finished on Tuesday that will not appear on an invoice until next month. It is the economic value your firm has created but has not yet converted to recognized revenue.
What counts as WIP
WIP in a services context includes three cost categories:
- Direct labor: Billable hours worked on a client project at the agreed billing rate, minus hours already invoiced.
- Direct expenses: Project-related costs such as travel, software licenses, or subcontractor fees that have been incurred and remain unbilled.
- Allocated overhead: A proportionate share of indirect costs (office, administrative support, equipment) assigned to the engagement.
Costs that are not directly tied to a specific client contract, such as business development time or general administrative work, do not qualify as WIP.
How ASC 606 shapes WIP accounting
Under U.S. GAAP, revenue recognition for professional services follows ASC 606. The standard requires firms to recognize revenue when a performance obligation is satisfied, either over time or at a point in time. For most long-term service contracts, revenue is recognized over time as the work progresses [3].
This creates a timing problem. Your team completes a milestone in March, the invoice goes out in April, and the client pays in June. Under accrual accounting, the revenue belongs in March. But if your WIP tracking lags, the revenue lands in the wrong period. Multiply this across 30 or 40 active projects, and your monthly P&L becomes unreliable. Every time.
ASC 606 introduced more discipline into WIP accounting because firms must now document the performance obligation, the transaction price, and the method for measuring progress. The standard does not prescribe a single method, it requires firms to choose one that faithfully depicts the transfer of control.
The WIP schedule
The WIP schedule is the core accounting tool for tracking unbilled work. It is a project-by-project ledger that records:
| WIP Schedule Component | Description |
|---|---|
| Contract value | Total agreed fee for the engagement |
| Costs incurred to date | Labor, expenses, and overhead accumulated |
| Revenue recognized to date | Amount already recorded in the P&L |
| Amount invoiced to date | What has been billed to the client |
| Unbilled WIP | Revenue earned but not yet invoiced |
| Overbilling | Amount invoiced but not yet earned |
A well-maintained WIP schedule gives finance teams an auditable connection between project inputs (hours, costs) and the revenue recorded on the income statement. It is the document auditors request during year-end review, and it is the basis for revenue recognition adjustments at period close. Skip it, and you are reconstructing numbers from memory.
How to calculate WIP
The basic formula for WIP in a professional services firm is:
WIP = (Hours Worked × Billing Rate) − Hours Already Invoiced
Start with what hurts, the hours that are done but not yet billed. For fixed-fee projects, the calculation uses the percentage-of-completion method:
Earned Revenue = Total Contract Value × % Complete
WIP = Earned Revenue − Amount Invoiced to Date
The completion percentage is based on one of three methods:
- Cost-to-cost method: Compare costs incurred so far against the total estimated project cost
- Effort-expended method: Compare hours worked so far against the total estimated hours
- Units-of-delivery method: Compare completed deliverables against the total planned deliverables
Each method has trade-offs. The cost-to-cost approach is the most common because it aligns with how most firms track project financials, but it depends on accurate cost estimates. If the total estimated cost is wrong, the completion percentage will be wrong, and revenue recognition will be distorted.
WIP journal entries
Three journal entries track WIP through the billing cycle:
- When work is performed but not yet billed: Debit Unbilled WIP (a current asset), credit Revenue.
- When the invoice is issued: Debit Accounts Receivable, credit Unbilled WIP.
- When the client pays: Debit Cash, credit Accounts Receivable.
These entries move value from WIP to accounts receivable to cash. The first entry is where most firms struggle, it requires knowing how much work was done before the invoice exists, which is why real-time time tracking matters.
Overbilling and negative WIP
When a firm invoices more than the revenue it has earned, the result is overbilling, sometimes called negative WIP or unbilled revenue deficit. This is a liability, not an asset. It means the firm owes the client work that has already been paid for. Overbilling appears in the WIP schedule as a negative unbilled WIP balance and must be tracked separately from earned WIP.
Why WIP tracking fails in most firms
Common WIP tracking failures include:
1. Late Time Entry
Consultants log time days or weeks after the work is done, so finance cannot calculate WIP accurately without current time data. The WIP balance is understated, and revenue recognition is delayed. A Monday morning timesheet that covers the previous Wednesday’s work is already four days stale.
2. Inconsistent Billing Milestones
If billing milestones do not align with actual project progress, WIP builds up. The firm has delivered value but has not invoiced for it, which distorts both the balance sheet and cash flow.
3. Spreadsheet-Based Tracking
Many mid-size firms manage WIP with spreadsheets. This works for a handful of projects but breaks down at scale, manual consolidation introduces errors, and by the time finance reconciles the spreadsheet, the data is already stale. A Friday afternoon rush to close the books, forty rows copied by hand, again.
4. Disconnected Project and Finance Systems
When project managers track progress in one system and finance tracks revenue in another, WIP falls through the cracks. The two systems need to share a single source of truth for hours, costs, and billing status, otherwise each team is working from a different picture of the same project.
How PSA software automates WIP accounting
Professional Services Automation (PSA) software addresses the structural gap between project delivery and financial reporting. Instead of reconciling spreadsheets at month-end, a PSA platform captures time, costs, and billing status in real time, as work happens.
Key WIP-related capabilities of a PSA system include:
- Real-time time tracking: Consultants log hours against projects as they work, so WIP is calculated continuously, not reconstructed after the fact.
- Automated WIP schedules: The system generates a WIP schedule for every active project, updated with each time entry and invoice.
- Revenue recognition automation: For fixed-fee projects, the PSA calculates percentage of completion and recognizes revenue based on the chosen method, without manual spreadsheet work.
- Billing milestone tracking: Project managers and finance teams see which milestones are approaching, which have been reached, and which are overdue for invoicing.
- WIP aging reports: The system flags WIP that has aged beyond a defined threshold, so project managers can investigate and invoice before the value becomes hard to collect.
Birdview PSA provides these capabilities in a single platform. Time entries flow directly into project financials, WIP schedules update automatically, and revenue recognition rules can be configured per contract type. Finance teams get a real-time view of unbilled WIP across all active engagements, and project managers get early warnings when WIP is aging or when billing milestones are missed.
WIP management checklist
Use this checklist to keep WIP under control:
- Consultants log time daily, not weekly
- Billing milestones match real delivery points
- WIP aging reviewed every week (flag anything over 30 days)
- Month-end WIP reconciliation against general ledger
- One system for both project delivery and finance
- Revenue recognition method documented per contract type
FAQ
What is the difference between WIP and accounts receivable?
WIP is the value of work performed but not yet invoiced. Accounts receivable is the value of invoices sent but not yet paid. WIP sits upstream of accounts receivable in the billing cycle, work flows from WIP to invoiced to accounts receivable to cash.
How does ASC 606 affect WIP accounting?
ASC 606 requires revenue to be recognized when a performance obligation is satisfied, not when an invoice is issued. For over-time contracts, this means revenue is recognized as work progresses, creating WIP on the balance sheet. The standard requires firms to document the performance obligation, the transaction price, and the method for measuring progress.
What is the WIP accounting entry?
When your team performs work but has not billed it yet, you debit Unbilled WIP (a current asset) and credit Revenue. When you issue the invoice, you debit Accounts Receivable and credit Unbilled WIP. When the client pays, you debit Cash and credit Accounts Receivable.
What is a healthy WIP balance?
There is no universal benchmark for WIP as a percentage of revenue because it depends on contract structure and billing cadence. A practical rule of thumb is that WIP should not exceed one to two months of billable revenue, if WIP is growing faster than revenue, the firm has a billing or collection problem.
What is the percentage-of-completion method for WIP?
The percentage-of-completion method recognizes revenue based on how much of the project is complete. The completion percentage can be measured by cost-to-cost (comparing costs incurred against total estimated costs), effort-expended (comparing hours worked against total estimated hours), or units-of-delivery (comparing completed deliverables against total planned deliverables). The cost-to-cost method is the most common.
Can WIP be negative?
Yes. When a firm invoices more than the revenue it has earned, the result is overbilling, sometimes called negative WIP. This is a liability, not an asset. It means the firm owes the client work that has already been paid for.
Sources
- SPI Research, 2026 Professional Services Maturity Benchmark, Service Performance Insight. 509 organizations, 245,000+ consultants. https://spiresearch.com/reports/2026-ps-maturity-benchmark/
- Corporate Finance Institute, “What Is Inventory? Raw Materials, WIP, and Finished Goods.” https://corporatefinanceinstitute.com/resources/accounting/inventory/
- Deloitte DART, “Revenue Recognized Over Time (ASC 606-10-25-27).” https://dart.deloitte.com/USDART/home/codification/revenue/asc606-10/roadmap-revenue-recognition/chapter-8-step-5-determine-when/8-4-revenue-recognized-over-time
