What Is Construction In Progress?
Construction in Progress (CIP) is a balance sheet line item that records the cost of long-lived assets that are still being built and are not yet ready for their intended use. It typically appears within property, plant and equipment (PP&E) or in the notes to the financial statements. In practical terms, CIP captures capital spending on projects such as factories, stores, warehouses, office buildings, data centers, pipelines or other major facilities before those assets are placed into service.
For investors, Construction in Progress matters because it shows where a company is committing capital for future growth or maintenance. A rising CIP balance can indicate expansion, modernization or large strategic projects underway. It can also signal that significant cash has already been invested in assets that are not yet contributing to revenue or operating profit.
| Ticker | Company | Price | GF Score™ | construction-in-progress |
|---|---|---|---|---|
| - | ||||
| - | ||||
| - | ||||
| - | ||||
| - |
The core intuition is straightforward: CIP represents unfinished capital assets. Unlike completed PP&E, these assets are generally not depreciated while construction is still underway. Once the project is completed and placed in service, the accumulated costs are reclassified out of CIP and into the appropriate fixed asset category, where depreciation begins.
A simplified way to think about it is:
That makes CIP less of a performance ratio and more of an accounting snapshot of capital projects in development.
- Construction in Progress records the cost of long-lived assets that are still under construction and not yet ready for use.
- It is usually reported as part of PP&E on the balance sheet.
- CIP is generally not depreciated until the asset is completed and placed into service.
- A rising CIP balance can indicate expansion, modernization or heavy capital investment, but it can also reflect project delays or cost overruns.
- The metric is most useful when analyzed alongside capital expenditures, PP&E growth, depreciation and management commentary about major projects.
How Is Construction In Progress Calculated?
Construction in Progress is not usually calculated from a single standardized public formula in the same way a ratio like ROCE or ROE is. Instead, it is an accounting balance built up over time from capitalized project costs.
GuruFocus historically defines Construction in Progress as the cost of construction work that is not yet completed, typically related to capital budget items. A CIP item is not depreciated until the asset is placed in service. Upon completion, the CIP balance is reclassified to the relevant fixed asset account, capitalized and then depreciated.
A simplified roll-forward looks like this:
The capitalized construction costs included in CIP may consist of items such as:
- materials and equipment used in the project,
- direct labor,
- engineering and design costs,
- contractor fees,
- site preparation,
- certain overhead directly attributable to construction, and
- in some cases, capitalized interest during construction.
Under U.S. GAAP, interest incurred during the construction of certain long-lived assets may be capitalized as part of the asset's cost rather than expensed immediately.1 IFRS has a similar concept for qualifying assets under IAS 23.2
Once the asset is substantially complete and ready for its intended use, the accounting changes:
After transfer, depreciation begins based on the asset's useful life:
Because reporting practices vary, some companies disclose CIP as a separate line item, while others include it within broader PP&E categories and discuss it in the footnotes. That means investors sometimes need to read the annual report carefully to identify the balance and understand what projects it includes.
Construction In Progress Trend Over Time
A company's Construction in Progress balance is often most informative when viewed over several years. A steadily rising balance may indicate a sustained investment cycle, such as building new facilities or expanding production capacity. A balance that rises sharply and then falls may simply reflect a major project being completed and transferred into operating assets.
Trend analysis is especially useful because CIP by itself does not tell you whether a project is on time, on budget or likely to earn an attractive return. To interpret the trend properly, investors should compare it with capital expenditures, future depreciation, management guidance and disclosures about major construction projects.
What Does Construction In Progress Tell You?
Construction in Progress tells investors how much capital is tied up in unfinished long-term assets. That can be useful in several ways.
First, CIP can provide an early signal of future capacity growth. If a manufacturer is building a new plant, a utility is expanding infrastructure or a retailer is opening new distribution centers, the CIP balance may rise well before the new assets begin contributing to revenue.
Second, CIP helps explain why a company may be spending heavily without seeing an immediate boost in earnings. Since unfinished assets are not yet in service, they may not generate revenue, but they still absorb cash and capital. This is one reason companies in expansion phases can show strong capital spending with delayed profit benefits.
Third, CIP can affect future reported earnings. Once projects are completed and transferred into depreciable asset accounts, depreciation expense usually increases. That means today's CIP can become tomorrow's depreciation burden, which may pressure future operating margins if the new assets do not generate sufficient returns.
In general:
- Higher or rising CIP may suggest expansion, modernization or large strategic investment.
- Persistently elevated CIP may also suggest delays, cost overruns or projects taking longer than expected to become productive.
- Declining CIP may indicate project completion, reduced investment activity or a pause in expansion.
The metric is especially relevant in capital-intensive industries such as industrials, utilities, energy, transportation, telecom and large-scale retail.
Limitations of Construction In Progress
Construction in Progress is useful, but it has important limitations.
First, CIP does not measure project quality or expected return. A large balance may reflect smart long-term investment, but it could just as easily represent poor capital allocation. The balance sheet records cost, not economic value.
Second, CIP can be difficult to compare across companies. Some businesses disclose it clearly, while others bury it within PP&E footnotes. Accounting classifications may also differ, especially across industries and reporting regimes.
Third, a rising CIP balance is not always a positive sign. It may indicate project delays, permitting issues, labor shortages, inflation in construction costs or management's inability to complete projects on schedule. Without context from filings or earnings calls, investors can misread the signal.
Fourth, CIP is not depreciated while the asset is under construction, which can temporarily make current earnings look better than they would after the asset enters service. Once the project is completed, depreciation expense begins, and the income statement impact becomes more visible.
Finally, CIP should not be interpreted in isolation. A company with a large CIP balance may still be financially strained if it is funding those projects with excessive debt or if expected demand does not materialize.
For these reasons, investors should usually pair CIP with:
- capital expenditures,
- free cash flow,
- PP&E growth,
- depreciation trends,
- debt levels, and
- management commentary on project timing and expected returns.
Real-World Example
A good way to understand Construction in Progress is to look at a capital-intensive business such as a utility or industrial company. These businesses often spend years building assets before those assets begin generating revenue.
Consider a regulated electric utility building a new transmission project or generation facility. During the construction phase, the company may accumulate hundreds of millions or even billions of dollars in CIP. That balance reflects real capital already committed, but the project may not yet be producing electricity, revenue or cash flow from operations tied to that asset.
This is why CIP can be an important leading indicator. If investors see CIP rising sharply at a utility, they may infer that the company is in the middle of a major investment cycle. That could support future rate base growth and earnings expansion, but it could also increase execution risk if the project faces delays or cost overruns.
A similar dynamic applies to large retailers and logistics operators building distribution centers, stores or fulfillment networks. During construction, the costs accumulate in CIP. Once the facilities open, the balance is transferred into buildings or leasehold improvements, and depreciation begins.
For a practical comparison, investors can examine how capital-intensive companies report this field relative to peers:
The key lesson is that CIP is best viewed as a bridge between capital spending today and operating assets tomorrow.
FAQs
What is a good Construction In Progress?
There is no universally "good" CIP number. A higher balance is not automatically better or worse. The right level depends on the company's industry, size, project pipeline and stage of investment. For investors, the more important question is whether the projects in CIP are likely to be completed on time, within budget and at attractive returns.
What is the difference between Construction In Progress and capital expenditures?
Capital expenditures, or capex, measure spending during a period. Construction in Progress is a balance sheet account showing the accumulated cost of unfinished long-lived assets at a point in time. Capex is a flow; CIP is a stock.
What is the difference between Construction In Progress and PP&E?
CIP is usually a subset of PP&E or a component disclosed within PP&E. The difference is that CIP relates to assets not yet ready for use, while the rest of PP&E generally includes completed assets already in service and being depreciated.
Can Construction In Progress be negative?
In normal reporting, CIP is generally not negative. It represents accumulated capitalized costs of unfinished assets. However, the balance can decline sharply if projects are completed and transferred out, impaired, written down or abandoned.
How should investors use Construction In Progress?
Investors should use CIP to understand a company's investment cycle, future capacity additions and potential future depreciation. It is most useful when analyzed alongside capex, cash flow, debt, project disclosures and management's explanation of what is being built and why.
- Accounts Payable - Money a company owes to suppliers for goods or services received but not yet paid, recorded as a current liability.
- Accounts Receivable - Money owed to a company by customers for goods or services delivered but not yet collected, recorded as a current asset.
- Retained Earnings - The cumulative net income a company has kept rather than distributed as dividends since its founding.
- Short-Term Debt - Borrowings and debt obligations due within one year, including the current portion of long-term debt.
- Total Assets - The sum of everything a company owns or controls with economic value, encompassing both current and long-term assets.
- Total Liabilities - The sum of all financial obligations a company owes to external parties, both current and long-term.
Summary
Construction in Progress is a balance sheet measure of capital tied up in unfinished long-lived assets. It helps investors see how much a company is spending on projects that have not yet entered service and are not yet being depreciated.
That makes CIP especially useful in capital-intensive industries where growth depends on building physical assets over time. On its own, the metric does not tell you whether those investments will succeed. But when combined with trend analysis, peer comparisons and management disclosures, it can offer valuable insight into a company's expansion plans, execution risk and future earnings profile.
Sources
- Financial Accounting Standards Board, ASC 835-20: Interest—Capitalization of Interest. https://asc.fasb.org/topic&trid=2127424
- IFRS Foundation, IAS 23 Borrowing Costs. https://www.ifrs.org/issued-standards/list-of-standards/ias-23-borrowing-costs/
- U.S. Securities and Exchange Commission, Beginner's Guide to Financial Statements. https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html
- Corporate Finance Institute, Capital Expenditure (CapEx). https://corporatefinanceinstitute.com/resources/accounting/capital-expenditure-capex/
- Investopedia, Construction Work-in-Progress. https://www.investopedia.com/terms/c/construction-work-in-progress.asp
- Wall Street Prep, Capital Expenditure (Capex). https://www.wallstreetprep.com/knowledge/capital-expenditure-capex/