A $12 million construction project sits on your balance sheet. The building reached substantial completion three months ago, but the CIP account remains untransferred.
Meanwhile, your auditors are questioning cost classifications from 18 months prior, and your tax team needs clarity on interest capitalization before the filing deadline.
Construction in progress accounting represents one of the most complex areas in fixed asset management. The stakes are significant: miscategorized costs trigger audit adjustments, delayed capitalization decisions impact depreciation schedules and tax positions, and poor documentation creates compliance vulnerabilities that surface years later.
This guide provides the decision frameworks, cost classification strategies, and audit defense approaches that finance executives need to manage construction in progress capitalization with confidence.
What Is Construction in Progress (CIP)?
Construction in progress (CIP) is a long-term asset account on the balance sheet that accumulates costs for assets under construction or development. The CIP account serves as a temporary holding classification until a project reaches substantial completion and the asset is placed in service.
Unlike completed fixed assets, construction in progress does not depreciate. The CIP account continues to accumulate costs throughout the construction phase, with depreciation beginning only after the asset transfers to its permanent fixed asset classification.
On the balance sheet, construction in progress appears under Property, Plant, and Equipment (PP&E) as a non-current asset. The CIP balance represents the cumulative capitalized costs of all ongoing construction projects, from initial planning through substantial completion.
When to Capitalize Construction in Progress
The capitalization decision determines whether construction costs increase asset value or reduce current period income. ASC 360-10 establishes the framework: capitalize costs that provide future economic benefit extending beyond the current period.
The following table outlines the critical triggers that require CIP capitalization:
Establishing Your Capitalization Threshold
The capitalization threshold represents the minimum project cost that warrants asset classification rather than immediate expense recognition. While GAAP does not mandate specific dollar amounts, most organizations establish thresholds between $5,000 and $100,000 based on materiality considerations.
Industry context matters significantly. A $25,000 threshold may prove appropriate for a mid-market manufacturing company, while a healthcare system managing hundreds of millions in annual capital projects might set thresholds at $100,000 or higher to reduce administrative burden.
The threshold decision balances three competing priorities: financial statement accuracy, administrative efficiency, and audit defensibility. Lower thresholds capture more asset costs but increase tracking complexity. Higher thresholds simplify processes but may understate balance sheet values.
Document your threshold policy in writing, ensure board approval, and apply it consistently across all capital projects. Auditors scrutinize threshold changes that coincidentally improve financial metrics.
What Costs to Capitalize in Construction in Progress
Cost classification represents the most consequential CIP decision. Capitalize too much, and you overstate assets while understating current expenses. Capitalize too little, and you trigger audit adjustments while losing tax deferral opportunities.
The following decision matrix clarifies which construction costs belong in CIP accounts versus operating expenses:
For more detailed guidance on managing the complete fixed asset lifecycle after CIP capitalization, see our comprehensive Fixed Asset Depreciation Guide.
Interest Capitalization Requirements
ASC 835-20 requires interest capitalization for qualifying assets when construction extends beyond brief periods. The standard aims to match borrowing costs with the asset's future economic benefits.
Calculate capitalizable interest using the weighted-average accumulated expenditures multiplied by the appropriate interest rate. For specific-purpose debt financing the project, use that rate. For general borrowings, apply the weighted-average rate of all outstanding debt.
Interest capitalization begins when three conditions exist simultaneously: expenditures have occurred, borrowing costs are incurred, and construction activities progress toward preparing the asset for use. Capitalization ceases when construction substantially completes or when activities suspend for extended periods.
Document your interest capitalization methodology, maintain detailed calculation worksheets, and reconcile capitalized amounts to interest expense quarterly. Tax treatment under IRC Section 263A may differ from book treatment, requiring careful coordination with your tax advisors.
Industry-Specific CIP Capitalization Thresholds
Capitalization thresholds vary significantly by industry based on typical project scale, capital intensity, and regulatory requirements:
Organizations facing the challenges of scaling fixed asset processes across growing portfolios should review our analysis of common Fixed Asset Management Challenges and Solutions.
The CIP Capitalization Process: Step-by-Step
Effective CIP management requires systematic processes from project initiation through final asset transfer. The following framework ensures consistent cost classification and audit-ready documentation.
Phase 1: Project Initiation
Establish the CIP account when project approval occurs and capitalize the first costs. Create a unique project identifier that links to all related invoices, purchase orders, and contracts. Document the business purpose, expected useful life, and capitalization threshold determination.
Open a dedicated general ledger account for each significant project or use subsidiary ledgers for detailed tracking. The chart of accounts structure should distinguish between project types and enable componentization for future depreciation.
Phase 2: Construction Period
Review every invoice for proper cost classification before posting to CIP accounts. Apply the capitalizable cost framework consistently, flagging questionable items for technical accounting review. Calculate and capitalize interest quarterly using documented methodologies.
Reconcile CIP balances monthly. Compare accumulated costs to budgets, investigate significant variances, and document explanations for audit purposes. Track scope changes through formal change order processes that trigger capitalization reassessments.
Phase 3: Substantial Completion
Determine substantial completion using objective criteria: certificate of occupancy received, operational testing complete, and asset capable of intended use. Substantial completion triggers the transfer to fixed assets, even if minor punch-list items remain.
Perform final cost reconciliation before transfer. Reclassify any remaining CIP costs that should have been expensed, adjust for vendor credits or refunds, and ensure all construction-period interest calculations are complete.
Phase 4: Asset Transfer and Depreciation
Transfer the complete CIP balance to the appropriate fixed asset category. Assign useful life, salvage value, and depreciation method based on asset class policies.
Begin depreciation in the month following the placed-in-service date. This timing aligns with tax treatment under the half-year, mid-quarter, or mid-month conventions. For organizations evaluating optimal depreciation approaches for newly capitalized assets, our guide on Fixed Asset Depreciation Methods provides detailed analysis of straight-line, declining balance, and units-of-production options.
Consider componentization opportunities for complex assets. Separating components with distinct useful lives (building shell, HVAC, electrical systems) optimizes depreciation patterns and simplifies future replacement accounting.
Seven Critical CIP Accounting Mistakes to Avoid
These errors consistently appear in audit findings and trigger material financial statement adjustments:
Building an Audit-Ready CIP Process
External auditors focus intensively on CIP accounts because construction projects involve significant judgment, span multiple periods, and frequently contain classification errors.
Prepare for audit scrutiny by maintaining comprehensive project files that document every material decision.
Each CIP project should include:
- Board approval minutes establishing:
- Business purpose
- Detailed budget with variance explanations
- Vendor contracts and payment documentation
- Substantial completion determination memo
- Componentization analysis supporting useful life assignments
- Interest capitalization worksheets with methodology notes
Create a CIP rollforward schedule that reconciles beginning balance, current period additions by cost category, interest capitalization amounts, transfers to fixed assets, and ending balance. Present this schedule with supporting detail at the project level, enabling auditors to trace individual transactions to source documents.
Implement quarterly CIP reviews with your CFO or Controller before audit season begins. Age-analyze all CIP projects, question items approaching two years, and investigate projects where substantial completion appears to have occurred without transfer. Address identified issues proactively rather than during fieldwork.
Tax Implications of CIP Capitalization Decisions
Construction in progress creates significant tax planning opportunities through depreciation timing, bonus depreciation eligibility, and cost segregation strategies. The placed-in-service date determines when tax depreciation begins, making the substantial completion determination a critical tax timing issue.
For tax years 2024-2025, the OBBBA legislation modified bonus depreciation rules, phasing down the 100% first-year deduction to 60% in 2024 and 40% in 2025. Organizations should carefully time CIP transfers to maximize available bonus depreciation before full phaseout.
Consider cost segregation studies for substantial construction projects. These engineering-based analyses separate building costs into shorter-lived components qualifying for accelerated depreciation. Property qualifying as 5-year, 7-year, or 15-year property under MACRS provides earlier tax deductions than the 39-year straight-line requirement for building structures.
The interaction between Section 179 expensing and CIP requires careful planning. Section 179 applies to qualifying property placed in service during the tax year, but CIP assets don't qualify until transferred to fixed assets and operational.
For organizations evaluating first-year expensing strategies, our detailed comparison of Section 179 vs Bonus Depreciation provides decision frameworks for 2025 planning.
Book-tax differences in CIP accounting require careful M-1 schedule management. Interest capitalization periods may differ, componentization strategies create basis differences, and abandonment timing generates reconciling items. Coordinate closely with tax advisors to identify permanent differences early and plan for deferred tax accounting impacts.
Automating CIP Management with Fixed Asset Software
Organizations managing multiple construction projects simultaneously face exponential complexity in spreadsheet-based systems. Manual processes introduce version control issues, formula errors, and audit trail gaps that become unmanageable as project portfolios scale.
Dedicated fixed asset management software transforms CIP tracking through automated cost accumulation, systematic transfer workflows, and integrated depreciation calculation. Modern platforms connect directly to accounts payable systems, flagging invoices for capitalization review and routing approved costs to correct project accounts.
Look for CIP modules that provide project-level cost tracking, automated interest capitalization calculations, substantial completion workflow triggers, mass asset creation for component transfers, and comprehensive audit trail reporting. The system should generate the detailed schedules auditors request without manual data compilation.
Integration capabilities matter significantly for organizations using ERP systems. The fixed asset platform should accept batch imports of construction costs, synchronize with general ledger close processes, and export tax depreciation data to preparation software. Real-time data visibility eliminates month-end reconciliation delays.
Small and mid-market organizations transitioning from spreadsheets should prioritize platforms that balance sophisticated functionality with implementation simplicity. Review our analysis of Fixed Asset Software for Small Businesses to understand how modern cloud platforms deliver enterprise capabilities at accessible price points.
FAQs
How long can an asset remain in CIP before transfer?
No specific GAAP timeline exists, but auditors question CIP projects exceeding 12-18 months without clear documentation explaining extended timelines. Transfer assets to fixed assets when substantially complete and capable of intended use, regardless of minor remaining punch-list items. Delayed transfers understate depreciation expense and create tax exposure.
Does construction in progress depreciate?
Construction in progress does not depreciate. Assets under construction provide no current economic benefit, making depreciation inappropriate. Begin depreciation only after transferring completed assets from CIP to their permanent fixed asset classification and placing them in service.
How do you determine substantial completion for CIP?
Substantial completion occurs when an asset is capable of its intended use, even if minor work remains. Objective indicators include: certificate of occupancy received, successful operational testing completed, asset occupied or in productive use, and only punch-list items outstanding. Document the determination date with supporting evidence for audit purposes.
What happens to abandoned CIP projects?
Write off abandoned construction projects to current-period expense. Recognize the loss when management makes a substantive decision to abandon or significantly curtail the project. Document the abandonment decision, board approval of the write-off, and lessons learned analysis. Salvage any recoverable materials or costs, adjusting the loss accordingly.
Can you capitalize internal labor costs to CIP?
Capitalize internal labor costs when employees work directly on construction projects rather than general supervision. Track time to specific projects through detailed timekeeping systems. Include direct labor plus attributable benefits and payroll taxes. Exclude general administrative overhead, management review time, and other indirect costs that would occur regardless of specific project activity.
How does CIP treatment differ from R&D capitalization?
CIP capitalizes costs for tangible assets under construction, while ASC 730 generally requires research and development costs to be expensed as incurred. Software development costs under ASC 350-40 follow different rules, capitalizing certain post-technological-feasibility costs. The distinction matters significantly for technology companies investing in both infrastructure projects and software development.
Moving Forward with Confident CIP Management
Construction in progress capitalization demands more than technical accounting knowledge. Finance executives who excel in this area combine thorough documentation practices, systematic decision frameworks, and proactive audit preparation with technology platforms that scale alongside growing project portfolios.
The organizations achieving consistent, audit-defensible CIP accounting share common characteristics: written capitalization policies with clear thresholds, structured review processes for cost classification decisions, comprehensive project-level documentation, quarterly rollforward schedules reconciling all activity, and integrated software platforms eliminating manual tracking limitations.
As construction projects increase in complexity and auditor scrutiny intensifies, the finance teams positioned for success recognize that sustainable CIP management requires systematic processes supported by purpose-built technology rather than spreadsheet workarounds.
