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What expenses are included in Construction in Progress?

Published in Construction Accounting 4 mins read

Construction in Progress (CIP) includes all costs directly related to building or developing a long-term asset, such as a building, machinery, or infrastructure, until it is ready for its intended use. These costs are capitalized, meaning they are recorded as an asset on the balance sheet rather than expensed immediately.

Understanding Construction in Progress (CIP)

Construction in Progress (CIP) is an asset account that holds the accumulated costs of a project during its development phase. It serves as a temporary holding account for all expenditures that will eventually become part of the completed fixed asset. Once the asset is finalized and ready for use, the total accumulated CIP balance is transferred to the appropriate fixed asset account (e.g., Buildings, Equipment), at which point depreciation begins.

Key Expenses Capitalized in CIP

A wide range of costs can be capitalized into the CIP account, provided they are directly associated with getting the asset ready for its intended use. These typically fall into several main categories:

  • Materials: Costs of all raw materials and components used in the construction. This includes:
    • Lumber, steel, concrete, wiring, plumbing
    • Fixtures, finishes, and built-in appliances
    • Any tools purchased specifically for and consumed by the project
  • Labor: Wages and related costs for personnel directly involved in the construction or assembly. This encompasses:
    • Wages paid to construction workers, supervisors, and specialized trades (e.g., electricians, plumbers)
    • Employee benefits (health insurance, payroll taxes) directly tied to these labor costs
    • Costs related to getting an asset ready for use, such as specialized training for operating new machinery during construction
  • Equipment: Costs related to the machinery and equipment used during the construction process. This can include:
    • Rental costs for heavy machinery (cranes, excavators)
    • Depreciation of owned equipment used exclusively for the project
    • Fuel and maintenance costs for construction equipment
  • Indirect Costs and Overhead: Certain indirect costs that are directly attributable to the construction project can also be capitalized. These include:
    • Architectural and Engineering Fees: Payments for design, blueprints, and structural analysis.
    • Permits and Licenses: Fees paid to governmental bodies for necessary approvals.
    • Surveying Costs: Expenses for land surveys and site mapping.
    • Site Preparation Costs: Costs for clearing land, excavation, grading, and utility connections.
    • Transportation Costs: Expenses for moving materials, tools, and equipment to the construction site.
    • Inspection Fees: Costs for mandatory building inspections.
    • Legal Fees: Expenses directly related to the acquisition of land or construction contracts.
    • Capitalized Interest: Interest expense incurred on funds borrowed specifically for the construction project, under specific accounting rules (e.g., when substantial activities are underway and expenses are being incurred).
    • Insurance Premiums: Project-specific insurance coverage during the construction phase.

Common CIP Expense Examples

To illustrate, here's a breakdown of typical expenses categorized under Construction in Progress:

Expense Category Examples
Direct Materials Concrete, steel beams, electrical wiring, plumbing pipes, roofing materials, specialized tools
Direct Labor Wages for carpenters, masons, electricians, project supervisors, related payroll taxes, employee benefits
Equipment Costs Rental fees for bulldozers, excavators, cranes; fuel; maintenance for project-specific equipment
Professional Services Architectural design fees, engineering fees, surveying costs, environmental studies
Permits & Fees Building permits, zoning fees, utility connection charges, inspection fees
Site Preparation Land clearing, excavation, grading, demolition of existing structures
Financing Costs Capitalized interest on construction loans
Transportation & Storage Freight costs for materials, storage fees for equipment or materials on site

Why Capitalize These Costs?

Capitalizing these costs ensures that the asset's recorded value reflects its true total cost, including all expenditures necessary to bring it to its intended use. This aligns with the matching principle in accounting, as the cost of the asset is expensed (through depreciation) over its useful life, matching the revenue it helps generate.

When Does CIP End?

Costs continue to be added to the CIP account until the asset is substantially complete and ready for its intended use. At this point, no further costs are capitalized. The total accumulated balance is then transferred out of the CIP account and into the permanent fixed asset account, and regular depreciation charges begin.