Why WIP is critical for service companies
In service companies — consulting, engineering, software development, architecture, marketing — projects often span several months or quarters. Personnel costs and ancillary expenses are incurred immediately, while billing follows contractual milestones, progress stages or final delivery. Without proper accounting for work in progress (Work in Progress, WIP), the income statement risks showing losses during investment months and inflated profits when invoices are issued.
In Switzerland, service SMEs with full bookkeeping must apply the matching principle for costs and revenue under Art. 958b CO and Swiss GAAP FER, in particular FER 22 for multi-period contracts. WIP is not a device to "improve" the numbers: it is the tool that aligns periodic results with actual project progress, preserving the integrity of operating margin.
This guide explains how to set up WIP rigorously, with repeatable and auditable criteria, avoiding the most common distortions in margin reporting by project, client and accounting period.
What work in progress means in accounting
In Swiss accounting terminology, WIP represents the value of services already delivered but not yet invoiced, net of advance payments received. On the balance sheet it typically appears under current assets with line items such as "Accrued revenue" or "Work in progress on service contracts". On the income statement, partial revenue recognition goes hand in hand with allocating the related costs.
| Element | Operational definition | Effect on margins |
|---|---|---|
| Direct project costs | Consultant hours, subcontracting, specific materials, expenses attributable to the engagement | Remain in cost of sales only if not capitalised in WIP |
| Revenue to recognise | Portion of the contract fee corresponding to actual progress | Increases period revenue proportionally |
| WIP balance (asset) | Accrued revenue minus amounts already invoiced or advance payments collected | Neutralises margin if revenue and costs are calibrated to the same criterion |
| Customer advances (liability) | Advance payments without a corresponding service yet accrued | Reduces gross WIP; must not be confused with accrued revenue |
| Contract loss | When expected costs exceed expected contract revenue | Must be recognised immediately, regardless of progress |
WIP valuation methods
The choice of method directly affects margin stability over time. For service contracts in Switzerland, the most common practices among SMEs and fiduciary firms are the following:
Percentage-of-completion method
Period revenue is calculated by multiplying the total contract fee by the percentage of progress (actual hours against budget, milestones reached, deliverables approved). Costs allocated to the project are recorded on the income statement in the same proportion, or capitalised and then realigned at month-end.
This is the preferred method for multi-year projects with a defined budget. It preserves the expected contract margin if progress is measured with objective criteria and updated regularly.
Cost-to-cost method
Accrued revenue corresponds to the ratio of actual costs to total estimated costs, applied to the contract fee. Formula: Accrued revenue = (Costs incurred ÷ Total estimated costs) × Contract fee.
Works well when costs faithfully reflect progress — typical in labour-intensive services. Requires budget review at every significant variance, otherwise margin distortions arise.
Milestone method
Revenue is recognised upon reaching contractually defined and verifiable stages (concept approved, go-live, documentation delivered). Each milestone carries a percentage weight of the total fee.
Suitable for contracts with clear deliverables. Margin remains stable if milestone weightings are consistent with the resource commitment planned for each phase.
Completed-contract method (certain revenue only)
Revenue and costs are allocated to the income statement only when the project is completed or an invoice is issued. Permitted for short contracts or immaterial amounts, but generates significant margin volatility on long engagements.
Not recommended for companies with multi-month projects: it distorts periodic results and makes quarter-on-quarter comparison difficult, even if formally simpler to manage.
How to preserve margins: the accounting logic
The most common error is treating WIP as a simple balance-sheet adjustment of costs without recognising the corresponding revenue — or vice versa. Both extremes distort margin. The operational rule is symmetrical:
Step 1 — Allocate costs to the project: hours and direct expenses initially pass through cost accounts by cost centre or internal order. At period-end, determine the portion of costs to match accrued revenue.
Step 2 — Calculate accrued revenue: using the chosen method (percentage, cost-to-cost or milestone), determine the amount of revenue to recognise regardless of invoicing date.
Step 3 — Reconcile WIP and margin: the WIP balance at period-end equals Accrued revenue − Invoices issued (± advances). Project margin is Accrued revenue − Related costs. If accrued revenue and related costs use the same progress criterion, the percentage margin remains aligned with the contract budget.
Numerical example
A consulting project of CHF 120,000 with expected costs of CHF 80,000 (expected margin 33.3%). At end-December, 50% of the work is complete: costs incurred CHF 42,000, no invoice yet issued.
- Accrued revenue: 50% × CHF 120,000 = CHF 60,000
- Costs matched to the period: CHF 42,000 (or CHF 40,000 if cost-to-cost is applied strictly against budget)
- WIP (accrued revenue): CHF 60,000
- Period margin on the project: CHF 60,000 − CHF 42,000 = CHF 18,000 → 30% on accrued revenue, consistent with progress
If only the CHF 42,000 of cost were recorded without accrued revenue, the project would show a margin of −100%. If costs were capitalised in WIP without revenue, net assets would be inflated without reflecting actual performance.
Recognition criteria under Swiss GAAP FER
FER 22 (Langfristige Aufträge) and the Swiss GAAP FER Framework establish when revenue — and therefore the related WIP — may be recognised. Before recording work in progress, systematically verify:
| FER criterion | Requirement | Practical implication |
|---|---|---|
| Contractual basis | There must be a binding contract with a determinable fee | Signed contract, accepted quote or confirmed order in writing |
| Reliable measurability | Progress must be determinable using an objective method | Approved timesheets, updated budget, documented milestones |
| Probability of fulfilment | It is highly probable that both parties will fulfil their contractual obligations | Verify client solvency, contract validity and default risk |
| Identifiable costs | Contract costs must be reliably attributable | Internal orders, project codes, mandatory time allocation |
| Immediate loss recognition | Expected contract losses must be recognised as soon as identified | Do not capitalise irrecoverable costs in WIP |
| Materiality | Non-significant contracts may follow simplified rules | Define an internal threshold (e.g. CHF 10,000 or duration > 2 months) |
For companies applying Swiss GAAP RPC or IFRS, the principles are similar but with greater detail on performance obligations. The accounting policy must be documented in the notes and applied uniformly to all comparable contracts.
Typical journal entries
The chart of accounts of service SMEs generally includes dedicated accounts. Here is the standard monthly flow for a project using the percentage method:
1. Recording direct costs (during the month)
Debit: 6200 Project salaries / 6270 Project expenses
Credit: 1020 Salaries payable / 2000 Trade payables
2. WIP adjustment at month-end (accrued revenue > invoices issued)
Debit: 1300 Accrued revenue (WIP)
Credit: 3400 Service revenue
At the same time, if costs were already allocated to the income statement, no further entry is required. If costs are capitalised instead, reverse the portion not yet accrued from cost of sales to WIP.
3. Invoice issuance (WIP reversal)
Debit: 1100 Trade receivables
Credit: 3400 Service revenue
Debit: 3400 Service revenue
Credit: 1300 Accrued revenue (WIP)
Alternatively, the invoice may close WIP directly: Debit Receivables / Credit WIP, without a double pass through the revenue account.
4. Advance received without accrued service
Debit: 1020 Bank
Credit: 2300 Customer advances (liability)
The advance reduces net WIP balance: Net WIP = Accrued revenue − Invoices − Advances not yet "consumed".
Year-end closing and cut-off
31 December (or the fiscal year-end date) is the critical moment for WIP. Auditors and tax authorities verify that revenue and costs are allocated to the correct fiscal year for income tax purposes.
Cut-off checklist
- Timesheets for 25–31 December allocated to the correct project
- Progress percentage updated and approved by the project manager
- December invoices recorded in the correct fiscal year (Art. 958b CO)
- Advances received reclassified between liabilities and WIP offset
- Loss-making contracts with dedicated provision
- Consistency between accounting WIP and project list in CRM/ERP
Tax impact
WIP recorded in the balance sheet increases taxable profit in the year in which revenue is accrued, even if the invoice is issued later. Similarly, WIP already invoiced but not yet recognised as revenue must be reversed.
The temporary difference between accounting result and cash is normal in services. Plan liquidity for income tax taking WIP into account, especially if many projects close at year-end.
WIP in internal reporting and financial statements
An integrated accounting system such as Accountex links internal orders, timesheets and billing, reducing the risk of discrepancies between project margin and accounting margin. The most useful reports for WIP control:
| Report | Content | Recommended frequency |
|---|---|---|
| Project progress status | Budget, costs incurred, % completion, accrued revenue, residual WIP | Weekly / monthly |
| Margin per engagement | Comparison of expected margin vs accrued margin (not invoiced only) | Monthly |
| WIP reconciliation | Account 1300 balance vs project detail from ERP | At each monthly close |
| Accrued revenue aging | WIP age by client — indicator of billing delays | Quarterly |
| WIP balance sheet note | Valuation method, total amount, criteria and contract risks | Annual (year-end close) |
Common errors that distort margins
Capitalising costs without accrued revenue
Recording all unbilled hours in WIP as an asset without recognising the corresponding revenue inflates equity and understates results. Margin appears artificially low in subsequent months when revenue is recognised in a lump sum.
Recognising revenue without updating progress
Applying a fixed percentage on 31 December to improve profit, without documentary evidence, exposes the company to auditor adjustments and tax risks for fictitious revenue.
Confusing advances with revenue
Recording an advance payment as invoiced distorts both WIP and margin. Advances remain liabilities until the service accrues to the corresponding extent.
Different methods for similar projects
Using cost-to-cost on one engagement and completed-contract on another similar one makes margins non-comparable and violates the principle of accounting consistency (Art. 958c CO).
Ignoring loss-making contracts
Continuing to capitalise costs on a project whose budget has overrun, without recognising the expected loss, overstates profit and WIP. The correction must be made as soon as the variance is probable and quantifiable.
Defining a company WIP policy
To ensure reliable margins over time, formalise a brief internal policy — approved by management and shared with the fiduciary:
- Materiality threshold for WIP application (minimum contract amount or duration).
- Default valuation method by service category, with justified exceptions.
- Frequency of progress updates and responsible party (project manager / team lead).
- Monthly and annual cut-off procedure with checklist shared between finance and operations.
- Rule for immediate recognition of contract losses.
- Documentation format for the auditor (progress report, budget, approvals).
With a clear policy and an accounting tool that links projects, costs and billing, WIP becomes a reliable management indicator — not a year-end adjustment — and period margins reflect the value actually created, regardless of the invoicing calendar.