Construction in Progress: PP&E You Cannot Yet Use

Key Takeaways

• Construction in progress is PP&E being built, recorded at gross cost, with no depreciation until placed in service.
• Capitalizable costs include materials, labor, contractor fees, and interest under ASC 835-20 for qualifying assets.
• A swelling CIP balance with little transfer to fixed assets can signal stalled projects or future writedowns.
• Investors should track CIP-to-PP&E ratio across years to see whether capex is converting into productive capacity.

What It Is

Construction in progress, often shown as CIP or "assets under construction," sits inside the property, plant and equipment block on the balance sheet. It captures the running total of costs incurred to build a fixed asset that is not yet ready for its intended use.

Typical items include factories under construction, pipelines mid-build, refinery turnarounds, internal-use software in development, and large IT or capital equipment installations. The balance can be huge for utilities, energy, industrials, and semiconductor firms running multi-year capital programs.

The Intuition

Accounting matches expenses with the revenues they help produce. A half-built plant produces no revenue yet, so depreciating it would distort current earnings. Parking the cost in CIP preserves the unit of measurement: spending stays on the balance sheet at full value until the asset is actually working.

The line also tells you something about the cycle. A company spending heavily on CIP today is building tomorrow's productive base. When those balances transfer into productive PP&E, depreciation steps up and operating capacity expands. Watching the flow between CIP and gross PP&E is a clean read on the capex cycle.

How It Works

Under ASC 360, costs are capitalized into CIP while construction proceeds. Direct materials, direct labor, contractor payments, permits, site preparation, freight, and installation all qualify. General administrative overhead does not.

Interest on borrowings used to finance the project is also capitalized under ASC 835-20 when the asset takes a substantial period to ready for use. The amount equals the weighted average accumulated expenditures multiplied by the company's borrowing rate, capped at total interest cost incurred.

Capitalized interest = weighted avg. expenditures x interest rate
Cap. interest <= total interest expense for the period

When the asset is substantially complete and ready for its intended use, the CIP balance transfers to the appropriate PP&E line, such as buildings, machinery, or equipment, and depreciation begins. CIP itself never depreciates. It can, however, be impaired under ASC 360 if a project is abandoned or its expected economic benefit falls below carrying value.

Worked Example

A chemicals company starts building a new plant on January 1 with expected completion in two years. By year end, it has spent $400 million on contractors and materials, $25 million on engineering, and incurred $20 million in interest on debt that financed the project.

The full $445 million sits in CIP at year end. No depreciation hits the income statement. When the plant is placed in service two years later at a total accumulated cost of $1.1 billion, the CIP balance transfers to "buildings and machinery," and depreciation begins over the asset's useful life, typically 20 to 40 years for industrial plants.

If, midway through year two, management abandons the project, the entire remaining CIP balance is written off as an impairment charge, reducing net income and equity in that period.

Common Mistakes

1. Treating CIP as productive capacity. Until transferred, CIP earns nothing. A company with $5 billion in CIP and stagnant revenue is spending without returns yet.
2. Ignoring capitalized interest. Interest inside CIP shifts what would be an expense into a future depreciation charge. Adjusting EPS for capitalized interest is a useful sharpening step.
3. Missing abandonment risk. Projects with shifting scope or repeated cost overruns often end in writedowns. Read the MD&A for delays and budget revisions.
4. Confusing CIP with inventory work in process. Inventory WIP becomes cost of goods sold. CIP becomes a fixed asset and then depreciation. Different statements, different sections.
5. Comparing CIP across industries. A utility builds for a decade. A retailer builds for a quarter. Compare CIP behavior only within sector.

Frequently Asked Questions

What is construction in progress in simple terms? Construction in progress is the cost of a building, plant, or major asset a company is constructing but has not yet started using. It sits on the balance sheet at full cost and does not depreciate.

How does construction in progress affect investment decisions? A growing CIP balance signals future productive capacity coming online. Investors model the eventual depreciation step-up and judge whether expected returns justify the capital tied up.

What is a real-world example of construction in progress? A semiconductor company spending several billion dollars on a new fabrication plant holds those costs in CIP for two to three years. Once the fab is qualified for production, the balance transfers to PP&E and starts depreciating.

How can investors avoid being misled by construction in progress? Watch the ratio of CIP to total PP&E and track transfers each year. A stalling balance with no transfers often hints at delays, abandonment risk, or upcoming impairment.

How is construction in progress different from work in process inventory? CIP is a fixed asset under construction and converts to PP&E. Work in process inventory is goods being manufactured for sale and converts to cost of goods sold once finished.

Sources

1. PwC Viewpoint. Property, Plant and Equipment 1.2 Accounting for Capital Projects. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/property_plant_equip/property_plant_equip_US/chapter_1_capitaliza_US/12_accounting_for_ca_US.html
2. PwC Viewpoint. Utilities and Power 12.2 Accounting for Capital Projects. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/utilities_and_power_/utilities_and_power__US/chapter_12_plant_US/122_accounting_for_c_US.html
3. CPCON. ASC 360 Impairment Testing for Long-Lived Assets. https://cpcongroup.com/insights/article/asc-360-compliance/
4. Texas Comptroller. Construction in Progress, Capital Asset Categories. https://fmx.cpa.texas.gov/fmx/pubs/afrrptreq/cap_assets/index.php?section=categories&page=construction

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.