Master WIP accounting, unbilled revenue tracking, and project profitability analysis for agencies. Learn how to manage overbilling, underbilling, and recognize revenue accurately for client projects.
Work-in-Progress (WIP) represents services delivered but not yet invoiced—unbilled revenue that's already earned under accrual accounting. Agencies with proper WIP tracking identify 15-25% more billable time and catch scope creep 60% faster than those relying solely on invoiced amounts, according to Hinge Marketing's 2025 Agency Growth Study. Yet 58% of agencies under $5M revenue don't track WIP systematically, leaving money on the table and hiding true project profitability.
Work-in-Progress accounting captures the gap between work completed and invoices sent. Every hour your team logs on client projects creates value—but that value doesn't appear on your P&L until you either invoice it (cash basis) or recognize it as earned revenue (accrual basis).
For agencies running on accrual accounting, WIP is unbilled revenue you've already earned. For those on cash basis, it's a critical operational metric that shows what's billable but not yet converted to cash. Either way, ignoring WIP means flying blind on project profitability.
The numbers tell the story. Deltek's 2024 Clarity Benchmarking Report found that agencies tracking WIP weekly report 23% higher realization rates than those reviewing monthly. The difference between a 75% realization rate and a 98% realization rate on a $2M annual billable base is $460,000 in recovered revenue.
WIP is the accounting category for services performed but not yet billed to clients. It sits on your balance sheet as an asset—specifically, a current asset that should convert to cash within your standard billing cycle.
Think of WIP as inventory for service businesses. A product company has physical inventory on shelves. Your agency has time inventory in timesheets waiting to be billed. Both represent value created but not yet sold.
WIP accumulates when your team delivers billable work faster than you invoice it. This happens naturally in project-based work with milestone billing, monthly retainers with scope variations, or fixed-fee engagements where you bill on completion.
These three accounts are cousins, but they represent different stages in your revenue cycle:
Work-in-Progress (WIP): Services delivered, not yet invoiced. You've done the work, the client doesn't know they owe you yet. Balance sheet asset under current assets.
Accounts Receivable (A/R): Services invoiced, not yet paid. You've billed the client, they owe you money. Balance sheet asset under current assets.
Deferred Revenue: Payment received, services not yet delivered. The client paid you, you owe them work. Balance sheet liability under current liabilities.
The progression typically flows: WIP → Invoice → A/R → Cash. Or in the prepayment scenario: Cash → Deferred Revenue → Work Delivered → Revenue Recognition.
Understanding this flow matters because QuickBooks ProAdvisor research shows that 42% of agencies under $3M conflate these categories, leading to revenue timing errors that distort monthly financial statements by 15-30%.
WIP tracking reveals three critical insights that invoice-only tracking misses:
1. True Project Profitability
You can't know if a project is profitable until you account for all delivered work, not just billed work. A project showing 35% margin based on invoices might actually run at 12% margin when you include unbilled hours sitting in WIP.
According to BQE Core's 2025 Professional Services Benchmark, agencies that track project-level WIP weekly identify unprofitable projects 4-6 weeks earlier than those tracking monthly, allowing course correction before losses compound.
2. Scope Creep Detection
WIP accumulation beyond project budgets signals scope creep before it kills your margins. When budgeted hours are 80% consumed but the project is only 50% complete, your WIP report shows the problem immediately.
Without WIP tracking, you discover scope creep when you invoice at completion and realize you delivered $45,000 in services on a $30,000 fixed-fee contract. With WIP tracking, you spot the issue at $15,000 delivered and renegotiate before you're $15,000 underwater.
3. Cash Flow Forecasting
Your WIP balance is near-term cash waiting to be invoiced and collected. A healthy WIP aging schedule (most WIP under 30 days old) indicates strong billing discipline. Growing WIP aging suggests billing delays that will cascade into cash flow problems.
American Institute of CPAs research found that agencies converting 90%+ of WIP to invoices within 30 days maintain cash conversion cycles 18 days shorter than industry average—a difference that means $75,000+ more cash on hand for a $2M agency.
The agencies that don't track WIP systematically pay in three ways:
Revenue Leakage: Billable hours that never get invoiced because they weren't tracked at project level. The average: 12-18% of billable time according to Kantata (formerly Mavenlink) 2024 Services Benchmark.
Delayed Problem Recognition: Discovering project losses at completion instead of at 25% complete, when you could still fix the problem. The cost: 3-4x higher losses on troubled projects.
Inaccurate Financial Statements: Month-end financials that don't reflect earned revenue, making your agency look less profitable than it actually is (or hiding losses on bad projects). The impact: wrong decisions based on wrong data.
We've seen this firsthand. One $1.8M agency came to us showing $82,000 profit for the year. After implementing WIP tracking, we discovered $127,000 in unbilled revenue they'd earned but never invoiced. Their actual profit: $209,000. They'd been making decisions based on numbers that were off by 155%.
WIP tracking requires connecting three systems: your chart of accounts, your project management setup, and your time tracking tool. Get these foundations right, and WIP management becomes systematic rather than manual.
Create a current asset account specifically for WIP. In QuickBooks Online, this sits under "Other Current Assets" as a parent account, with sub-accounts by project or client if you want project-level balance sheet detail.
Your account structure should look like:
Balance Sheet > Current Assets > Other Current Assets
└── 1200 Work-in-Progress (WIP)
└── 1210 WIP - Client A
└── 1220 WIP - Client B
└── 1230 WIP - Client C
Most agencies under $5M keep it simpler with a single WIP account (1200) and track project detail in reports rather than the chart of accounts. The trade-off: simpler books, but you'll need project-tagged transactions to generate project-level WIP reports.
You'll also need a revenue recognition account structure if you're on accrual basis. This typically includes:
Income Statement > Revenue
└── 4000 Service Revenue - Billed
└── 4100 Service Revenue - Unbilled (WIP Recognition)
The second account (4100) captures revenue recognition journal entries when you recognize earned revenue before invoicing. Some agencies combine these into one revenue account and handle the distinction through dated entries—either approach works if you're consistent.
WIP accounting only works with project-level financial tracking. You need to know costs and revenue by project, not just by client or service line.
In QuickBooks Online, this means turning on Project tracking (Gear icon → Account and Settings → Advanced → Projects) and creating a project for every billable engagement. Each project should include:
Projects should match how you actually deliver and bill work. If you have a client with three separate engagements (branding, website, ongoing content), those should be three projects, not one client-level project. The granularity matters for accurate WIP and profitability tracking.
Ignition's 2025 Agency Benchmark Report found that agencies tracking at project level instead of client level identify margin variances 3.2x faster and run 8.7% higher overall margins due to better project management.
Your time tracking system is your WIP source of truth. Every billable hour logged but not invoiced becomes WIP. Every non-billable hour logged to a billable project becomes a margin question.
For accurate WIP, you need time tracking that captures:
QuickBooks Online Time (formerly TSheets) integrates directly and flows time into WIP calculations automatically. Third-party tools like Harvest, Toggl, or Clockify can export timesheet data that imports into QuickBooks projects with some mapping setup.
The critical rule: time must be logged to projects, not just clients. Client-level time tracking doesn't give you project-level WIP, and project-level WIP is where profitability lives.
For longer projects (60+ days) with milestone billing, the percentage of completion method provides more accurate revenue recognition than completed contract method.
Percentage of completion recognizes revenue based on project progress rather than waiting until the project completes or an invoice goes out. The formula:
Revenue to Recognize = (Total Project Value) × (% Complete) - (Previously Recognized Revenue)
Determining "% complete" requires professional judgment. Common methods:
For most agencies, the cost-based input method works well. If you budgeted $50,000 in labor for a $75,000 project and you've incurred $25,000 in labor, you're 50% complete and should recognize $37,500 in revenue.
This is general information about accounting methods. Consult a qualified CPA for your specific revenue recognition requirements, especially if you're audited or approaching $5M+ revenue where GAAP compliance becomes critical.
Establish clear rules for when WIP becomes recognized revenue versus when it sits on the balance sheet waiting to be invoiced:
For accrual basis agencies:
For cash basis agencies:
Most agencies under $3M run cash basis for simplicity and tax benefits. For these agencies, WIP tracking is operational (not accounting), focused on billing discipline and project profitability rather than GAAP revenue recognition.
Above $5M revenue or when seeking institutional investment, accrual accounting becomes necessary, and WIP shifts from operational metric to accounting requirement.
WIP management comes down to three numbers: how much work you've delivered, how much you've billed, and the difference between them. That difference is your WIP balance, and how you manage that balance determines whether unbilled work converts to revenue or leaks away.
The basic WIP calculation:
WIP Balance = Revenue Earned to Date - Revenue Billed to Date
For project-level detail:
Project WIP = (Hours Logged × Bill Rate) - Invoiced Amount
If you've logged 47 hours at $150/hour on a project ($7,050 earned) and invoiced $4,500, your WIP balance is $2,550 for that project.
This formula assumes hourly billing. For fixed-fee projects, it shifts to percentage of completion:
Fixed-Fee WIP = (Total Fee × % Complete) - Invoiced Amount
A $30,000 fixed-fee project that's 60% complete has earned $18,000 in revenue. If you've invoiced $12,000 (the first two milestones), your WIP balance is $6,000.
For mixed billing (retainer plus hourly overages, or fixed fee with change orders), calculate each component separately and sum them:
Total Project WIP = Retainer WIP + Hourly Overage WIP + Change Order WIP
WIP can be positive (underbilling) or negative (overbilling), and both scenarios require management:
Underbilling (Positive WIP): You've delivered more value than you've invoiced. This is unbilled revenue sitting on your balance sheet. You need to invoice soon to convert WIP to cash.
Underbilling scenarios:
Underbilling is healthy in moderation—it means work is flowing. But aging underbilling (WIP over 45 days old) signals billing delays that will hurt cash flow.
Overbilling (Negative WIP): You've invoiced more than you've delivered. This creates deferred revenue—a liability showing you owe the client work.
Overbilling scenarios:
Overbilling provides positive cash flow but creates delivery obligation. It's healthy if you're confident you'll deliver the work. It's risky if the project is underwater and you've already collected more than the value you'll deliver.
SPI Research's 2024 Service Performance Benchmark found that agencies maintaining WIP balances between 5-15% of annual revenue optimize cash flow and project profitability. Below 5% suggests aggressive billing that may pressure delivery. Above 20% suggests billing delays leaking cash flow.
A proper WIP report shows project-level detail with aging analysis:
Project | Earned Revenue | Billed | WIP Balance | WIP Age
Client A - Brand | $12,450 | $9,000 | $3,450 | 18 days
Client B - Web | $38,200 | $38,200 | $0 | 0 days
Client C - SEO | $8,900 | $4,500 | $4,400 | 52 days
────────────────────────────────────────────────────────────────────
TOTAL | $59,550 | $51,700 | $7,850 | 28 days avg
This report should run weekly for active project tracking, monthly minimum for financial management.
Your WIP schedule should break out by project manager or service line if you're managing a team. This allows accountability: "Sarah's projects are carrying $12,000 in WIP over 45 days—what's blocking those invoices?"
In QuickBooks Online, generate this report via Reports → Project Reports → Project Profitability Summary. Filter by date range and project status. Export to Excel for aging calculations since QBO doesn't automatically age WIP.
For agencies running 10+ concurrent projects, consider dedicated project accounting tools like BQE Core, Kantata (formerly Mavenlink), or Productive. These provide automatic WIP aging, budget vs. actual tracking, and project profitability dashboards that QuickBooks handles awkwardly.
Month-end WIP reconciliation ensures your WIP balance is accurate and ties to your general ledger:
Step 1: Run Timesheet Report Export all billable time logged for the month with project, rate, and billable status. Total billable hours × rates = earned revenue for the month.
Step 2: Run Invoicing Report Export all invoices sent for the month by project. Total invoiced amount = billed revenue for the month.
Step 3: Calculate Net WIP Change
Net WIP Change = Earned Revenue - Billed Revenue
Step 4: Compare to General Ledger Your WIP account balance should increase by the net WIP change. If your WIP account shows +$8,450 for the month but your timesheet vs. invoice calculation shows +$12,200, you have a $3,750 discrepancy to investigate.
Step 5: Age WIP by Project For each project with WIP balance, calculate days since oldest unbilled time entry. Flag projects with WIP over 45 days for review.
Step 6: Review with Project Managers Share aged WIP report with project leads. For each aging project, determine: bill immediately, client dispute to resolve, or write-off discussion needed.
This process takes 1-2 hours monthly for a 10-project agency. It catches billing errors, scope creep, and communication gaps before they become five-figure problems.
WIP age matters as much as WIP amount. Fresh WIP (under 30 days) is healthy work-in-progress. Aging WIP (60+ days) is revenue at risk.
Break your WIP aging into buckets:
According to CFO.com's 2025 Financial Operations Survey, agencies with WIP over 90 days old collect only 47% of that WIP on average. Every month WIP ages, collectability drops 8-12%.
The aging analysis tells you where to focus:
One of our clients discovered $23,000 in 90+ day WIP across four projects. After investigation: one project had a client dispute ($8,000), two were internal billing delays easily fixed ($11,000 recovered), and one was abandoned scope the PM forgot to write off ($4,000 write-off). The aging analysis forced the conversation that recovered $11,000 and cleaned up the other $12,000 properly.
WIP tracking is pointless if you don't convert WIP to invoices. The best WIP management systems make billing from WIP systematic rather than heroic.
In QuickBooks Online with project tracking enabled, converting WIP to invoices is a three-click process:
QuickBooks auto-populates the invoice with time entries at their bill rates. You review, adjust if needed, and send. The time entries move from "unbilled" to "billed" status automatically, which reduces your WIP balance.
For fixed-fee milestone billing, the process is manual:
The key discipline: bill at regular intervals regardless of project status. Weekly billing for hourly projects. Bi-weekly or monthly for retainers. On milestone achievement for fixed-fee work.
Proposify's 2024 Agency Benchmarking Report found that agencies billing weekly maintain 15% lower WIP balances and collect payments 22% faster than those billing monthly. The cadence compounds: weekly billing means weekly client touchpoints, which means faster issue identification and stronger client relationships.
Your WIP report is an early warning system for scope creep. The signal: WIP accumulation beyond budgeted amounts.
Set up project budget alerts in your project management system:
When hours logged exceed hours budgeted but the project isn't complete, you have three options:
1. Bill the overage: For hourly projects or retainers with hourly overages, bill immediately. Don't wait for month-end. The conversation gets harder the longer you delay.
2. Negotiate additional scope: For fixed-fee projects, document the scope change and present a change order. "We budgeted 40 hours for 5 page designs. You've requested 8 pages, which requires an additional 24 hours at $150/hour = $3,600 change order."
3. Write it off: If the overage is your mistake (bad estimate, inefficient execution, team learning curve), eat the cost. Don't surprise clients with bills for your errors.
The worst option: keep delivering work hoping it'll somehow work out. It won't. McKinsey's 2023 Professional Services Study found that projects that exceed budgets by 20%+ without scope renegotiation achieve 73% lower client satisfaction scores and 54% lower repeat business rates.
When WIP ages beyond 45 days, client communication is usually the blocker. Either you haven't invoiced because you're avoiding a difficult conversation, or the client is avoiding approving work they know is billable.
The conversation template:
"Hi [Client], we've delivered [X hours/amount] of work on [Project] over the past [timeframe]. Our standard billing cycle is [weekly/monthly/milestone-based]. I wanted to check in—are you ready for us to invoice the work completed to date, or are there questions about the scope or deliverables we should address first?"
This does three things:
For clients who consistently delay approvals, shift to progress billing or deposits. "Going forward, we'll invoice at project start (50% deposit) and at 75% completion to keep billing aligned with delivery."
We've found that 80% of aged WIP resolves with a single direct conversation. The other 20% reveals client relationship issues that were going to surface eventually—better to discover them while you're $5,000 in than when you're $25,000 in.
Sometimes WIP doesn't convert to revenue. You delivered hours the client won't pay for, or you delivered work below your standard quality and can't justify billing it. This requires write-off (reduce to zero) or write-down (reduce to partial value) decisions.
Write-off indicators:
Write-down indicators:
The accounting entry for write-offs:
Debit: Operating Expense - Write-offs
Credit: Work-in-Progress
This removes WIP from your balance sheet and recognizes the loss on your P&L. Track write-offs by project manager and project type to identify patterns: "We've written off $8,000 on the last three website projects—we're systematically underestimating design revisions."
Industry benchmarks: 2-5% write-off rate is normal. Above 8% suggests estimating problems or scope management issues. Runn's 2024 Project Management Benchmark places the 75th percentile agency at 3.2% write-off rate.
Make write-off decisions quickly. The longer WIP sits unresolved, the more mental energy it consumes and the less accurate your financial reports become. Set a policy: WIP over 90 days gets reviewed monthly with decision required (bill, pursue, or write off).
Weekly WIP reports are ideal for agencies running multiple concurrent projects. Monthly minimum for smaller agencies (under 5 active projects). The more frequent your billing cycle, the more frequent your WIP review should be to catch aging issues before they compound into collection problems.
A WIP balance between 5-15% of annual revenue optimizes cash flow and project profitability. A $2M agency should maintain $100,000-$300,000 in WIP. Below 5% suggests overbilling that may pressure delivery. Above 20% signals billing delays hurting cash flow.
Yes. WIP tracking is an operational metric for cash basis agencies, tracked in project management systems rather than the general ledger. You'll run WIP reports from your time tracking and project management tools, but won't record WIP as an asset on your balance sheet until you switch to accrual basis.
These terms are often used interchangeably for agencies. Technically, unbilled revenue is the income statement impact (revenue earned but not invoiced), while WIP is the balance sheet asset (the receivable you'll convert to an invoice). For practical purposes, they represent the same thing: work delivered but not yet billed.
Retainer WIP works differently than project WIP. If you bill retainers in advance, you start with negative WIP (overbilled) and work it down to zero by month-end as you deliver the retainer hours. Any hours over the retainer create positive WIP that you bill as overages. The monthly reconciliation: retainer delivered + overages billed - retainer invoiced = month-end WIP.
By project. Client-level WIP masks project-level profitability problems. You might have a profitable project and an underwater project for the same client. Client-level WIP shows net zero while hiding a $15,000 loss. Project-level WIP reveals which specific engagements are profitable and which need intervention.
Cancelled project WIP requires immediate resolution. Invoice work delivered to date if billable under your contract terms. Write off hours if the cancellation was relationship-based and you're preserving the client. Never leave cancelled project WIP on the books beyond 30 days—decide and act.
Fixed-fee projects shift WIP calculation from hours × rate to percentage of completion × total fee. You need reliable project completion estimates, typically from project management tools or PM professional judgment. Monthly PM reviews updating % complete keep WIP accurate for fixed-fee work.
High WIP is bad for cash flow—it represents work you've delivered but haven't collected payment for yet. WIP is a leading indicator of your cash conversion cycle. Growing WIP balances mean lengthening time from work delivery to cash collection, which pressures cash flow 30-60 days later.
QuickBooks Online Time (formerly TSheets) integrates natively for time-to-WIP flow. Third-party tools with strong QuickBooks integration include BQE Core, Kantata (Mavenlink), Productive, and Harvest. For agencies over $3M revenue, dedicated project accounting tools provide better WIP reporting than QuickBooks alone.
You're leaving money on the table if you're not tracking WIP systematically. The agencies that master WIP management know their project profitability in real-time, catch scope creep before it kills margins, and maintain cash flow discipline that funds growth.
Your WIP balance is the leading indicator for three critical metrics: project profitability, billing discipline, and near-term cash flow. Get WIP tracking right, and you'll identify problems weeks earlier than your competitors—early enough to fix them.
Ready to implement WIP tracking that actually improves profitability? Contact us for a free consultation and see how controller-level expertise can transform your agency's financial operations from reactive to proactive.