Job Cost Accruals at Month-End: Keeping WIP Honest When Invoices Arrive After the Close
In construction, a significant amount of work is performed, materials installed, and equipment used before the corresponding invoices arrive. A sub works for three weeks in March and submits their pay application in early April. Material is delivered on March 28 but the supplier's invoice doesn't arrive until April 10. Labor worked on a union project is billed on an April 15 fringe benefit invoice.
If the month-end close just captures invoices that have been received, March's job costs are understated, March's WIP is wrong, and April's numbers will look worse than they should. Job cost accruals fix this by booking the costs in the month the work happened, not the month the invoice happened.
Done correctly, accruals produce an accurate WIP report each month and keep percentage-of-completion revenue recognition aligned with actual costs incurred. Done sloppily — estimates based on gut feel, accruals reversed without proper offset, inconsistent categories — they create erratic month-to-month swings that make financial reporting unreliable.
Job cost accruals break into three main categories, each with its own calculation method.
The three main job cost accrual types
- Accrued subcontractor costs — work performed by subs through month-end that hasn't been invoiced. Usually the largest accrual, since subcontracts are typically the largest cost category on construction projects.
- Accrued materials — materials received on site through month-end that haven't been invoiced yet by the supplier. Includes both installed materials and stored materials if the contract allows billing for stored materials.
- Accrued labor, payroll taxes, and fringes — wages earned through month-end not yet paid in the payroll cycle, plus fringes and payroll taxes attributable to that payroll.
Each category has its own data sources and calculation logic. A consistent process that handles all three month after month keeps the accruals reliable.
Subcontractors typically bill on a monthly cycle. The pay application covers work through a specified date (often the 25th of the month) and is submitted in early-to-mid of the following month. If the month-end for the contractor's books is the last day of the month and the sub's pay application cutoff was the 25th, the sub has worked 5-6 days after their billing cutoff but before the contractor's month-end. That time isn't on any pay application yet — so it's accrual material.
The calculation: for each active subcontract, estimate the work performed in the gap between the sub's last cutoff and month-end. Methods vary in sophistication. The simplest pro-rates the sub's monthly billing across the work days, multiplied by the days of accrual. A more accurate method uses the project's percentage-complete progress to back-calculate what the sub should have billed through month-end.
The process-oriented approach is to have each project manager submit an estimate of uninvoiced sub work through month-end, and reconcile those estimates against subsequent pay applications. Over time, the project managers' estimates improve; the first few months may have significant adjustments, but a disciplined process converges to accurate estimates within three or four close cycles.
Materials arrive on site days or weeks before the corresponding supplier invoice. A steel delivery on March 28 might not be invoiced until April 5 or April 15 depending on the supplier's billing cycle. If the steel was installed in March (or is being held as stored materials billed in March's pay application), the cost needs to be recognized in March.
The data source for materials accruals is the receiving log — the list of delivery tickets signed on-site with dates. For each delivery signed before month-end that doesn't have a matching invoice yet, the quantity and unit price (from the PO) is used to calculate an accrued amount.
Accuracy depends on the purchase order system. When POs are cut with unit prices and quantities before materials arrive, the accrual is straightforward — PO quantity × PO unit price − already-invoiced portion = accrued balance. When POs are vague or created after the fact, the accrual relies on estimates that are harder to verify.
When payroll is biweekly, month-end usually falls mid-pay-period. Labor has been performed through month-end but hasn't been paid yet; the next payroll run will cover it. The accrual booked at month-end covers the days worked through the end of the month that are in the upcoming payroll.
Calculation: take the time records from the partial period (covering the days through month-end), apply the hourly rates, add employer payroll taxes (FICA, Medicare, state and federal unemployment, workers' comp) at the standard burden rate. For union labor, add the fringe benefit contribution (pension, health, annuity, apprenticeship training) at the contract rates.
Union labor fringes can be larger than direct wages in some trades — a journeyman plumber on a union project might have $55/hour direct wage and $45/hour fringes. The accrual has to capture both, and the fringe portion is usually a larger ratio than the payroll tax burden on non-union work. Getting this accurately means the accrual calculation needs the correct fringe structure for each class of worker.
The most common labor accrual error is booking only the direct wages and missing the fringes and employer taxes. The fringes and taxes can be 40-60% of the direct wage on union work, so missing them dramatically understates the accrual.
For equipment charged to jobs through an equipment rate, there's an accrual for equipment used in the period. For owned equipment at an internal rate, the accrual is the hours used × internal rate. For rented equipment, it's the rental days/hours through month-end × rental rate.
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The source data is equipment usage logs maintained on site (equipment clock hours, rental company delivery/pickup dates). Tighter projects capture this in real time; looser projects reconstruct it at month-end, which introduces error.
Every accrual has to be reversed in the following month. If $120K of sub work is accrued at March 31, that $120K reverses on April 1. Then when the sub's actual April pay application arrives (covering the work that was accrued plus new work performed in April through their cutoff), the actual amount is recorded. The net result is that March's costs are right, April's costs are right, and there's no double-counting.
The reversal discipline is non-negotiable. An accrual that's booked but not reversed appears as a permanent cost; the month it was booked captures the cost twice (once through the accrual and again through the eventual invoice). Some accounting systems handle the reversal automatically with a flag on the journal entry; others require a manual reversing entry at the start of each month.
Month over month, the accrual estimates get compared to what actually came in. A pattern where accruals are consistently higher than actuals means the estimates are conservative; consistently lower means they're optimistic. Either pattern is worth adjusting. The best practice: a month-end close binder that includes, for each category, the accrual amount booked last month, the actual amount that came in this month, and the variance.
Over time, the variance should be small. Early in the year, individual months may have meaningful variances; the annual summary shouldn't. When the annual sum of "accrued subcontractor work" consistently differs from actual subcontractor costs by more than 2-3%, the methodology needs review.
Accruals feed directly into the WIP report. The project's costs-to-date must include everything incurred through the reporting date — including accrued amounts not yet invoiced. Without accruals, the costs-to-date are understated; the percentage-complete calculation (costs-to-date ÷ total estimated cost) is lower than it should be; revenue earned is lower than it should be; gross profit is either higher or lower depending on the direction of the distortion.
The WIP's "costs earned" line should reconcile to: invoiced costs + accrued costs − costs related to work not yet performed. That reconciliation is the check that accruals are being applied correctly. When the WIP's costs-to-date doesn't match the G/L's project costs including accruals, something is wrong — typically either accruals or reversals are missing.
At year-end, accruals get audit scrutiny. The auditor will look at specific subs' year-end accruals and trace them to the pay applications received in January, verifying that the accrual reasonably matched the actual. Significant variances require explanation. Auditors will also look at the offsetting reversal — did the December accrual actually reverse in January with a clean offset against the invoice?
Documentation of the year-end accrual calculation method — the assumptions, the data sources, the reasoning behind each major accrual — speeds the audit. Accruals that can't be reconstructed from documentation become audit findings.
Job cost accruals at month-end keep job costs, WIP, and percentage-of-completion accurate when invoices don't arrive in the same period as the work. The three categories — subcontractor, materials, labor — each have their own data sources and calculation logic, and all three need the reversal discipline in the following month. Done consistently, accruals produce reliable monthly financials and a WIP that auditors can tie to the G/L. Done inconsistently, they create month-to-month volatility that obscures project economics and invites audit findings.
Written by
Sarah Blake
Head of Product
Former AP Manager at a $200M construction firm, now leads product at Covinly. Writes about what AP teams actually need from automation — beyond the marketing promises.
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