Construction & Real Estate: Work in Progress Accounting to Avoid Tax Shocks

In the dynamic construction and real estate sectors, accurate accounting for Work in Progress (WIP) is critical to maintaining financial transparency, meeting KRA compliance, and avoiding unexpected tax liabilities. Misclassifying or underreporting WIP can lead to costly tax shocks during audits or statutory reporting. This guide provides a comprehensive approach for Kenyan construction and real estate businesses to manage WIP in line with IFRS standards, eTIMS integration requirements, and the latest 2026 Finance Act updates.

What is Work in Progress (WIP) accounting in Construction and Real Estate?

Work in Progress represents partially completed construction or development projects and is a key accounting item that impacts both profit reporting and tax liability. Accurate WIP valuation ensures compliance with IFRS and KRA standards.

In accounting terms, Work in Progress (WIP) refers to the cost of construction or real estate projects that are not yet completed but have incurred expenses, including:

• Materials purchased for the project

• Direct labor costs

• Allocated overheads

• Subcontractor expenses

WIP affects the profit reported in financial statements. Misreporting WIP can either inflate profits, leading to higher taxable income, or understate profits, impacting cash flow planning.

From January 1, 2026, KRA will strictly disallow expenses that are not supported by eTIMS-compliant invoices. Construction companies must ensure all WIP costs are backed by proper e-invoices, including materials and subcontractor payments, to avoid disallowed expenses during audits.

Learn more about our Audit and Assurance Service to ensure accurate reporting.

Why Correct WIP Accounting Matters for Tax Compliance

Incorrect WIP accounting can trigger significant tax liabilities, as KRA scrutinizes WIP reporting during audits to prevent inflated deductions. Compliance ensures alignment with IFRS and Kenya Companies Act requirements.

Properly accounting for WIP ensures that revenue recognition and expenses match the project timeline. Under IFRS, construction contracts typically follow the percentage-of-completion method, where profits are recognized based on the stage of project completion.

Key tax implications of misreporting WIP include:

With the 2025 Finance Act amendments, KRA now requires detailed WIP schedules during audits for projects exceeding KES 5 million. This includes materials, labor, subcontractor payments, and overhead allocation. Failure to provide these schedules can result in additional tax assessments and penalties.

For assistance in WIP compliance and tax planning, contact our tax compliance advisory team.

Methods for Valuing Work in Progress

WIP can be valued using cost, percentage-of-completion, or stage-of-completion methods. Choose a method consistent with IFRS and KRA expectations, and document assumptions clearly to withstand audit scrutiny.

Common WIP valuation methods include:

1. Cost Method:

   • Values WIP at the total incurred costs to date.

   • Simple but may understate profit if revenue recognition is delayed.

2. Percentage-of-Completion Method (IFRS 15):

   • Revenue and profit are recognized proportionally to project completion.

   • Requires detailed project progress tracking and milestone documentation.

3. Stage-of-Completion Method:

   • Similar to percentage-of-completion but uses physical progress or deliverables as the measure.

   • Suitable for complex construction projects with phased deliveries.

For 2026 reporting, all WIP methods must be reconciled with eTIMS invoices for expenses. KRA audits now prioritize matching labor and material costs to e-invoices for validation.

Learn more about our Bookkeeping Services to ensure accurate WIP tracking.

Common Pitfalls in WIP Accounting

Frequent errors include omitting subcontractor costs, misallocating overheads, and ignoring eTIMS requirements. Audit readiness depends on accurate and fully supported WIP schedules.

Top mistakes in construction and real estate WIP accounting:

• Ignoring subcontractor invoices: KRA requires all subcontractor costs to have e-invoices.

• Incorrect overhead allocation: General overheads must be allocated proportionally across projects.

• Failure to reconcile WIP with project progress: Using estimated progress without documentation can trigger KRA queries.

• Delayed recognition of project revenue: Can misstate taxable profit if percentage-of-completion method is not applied correctly.

The KRA Automated Payment Plan (APP) in 2026 allows partial tax relief if WIP and project revenue reporting are accurate and fully supported by compliant invoices. Companies failing to reconcile WIP schedules miss these relief opportunities.

For detailed guidance, book a consultation with our audit experts.

Steps to Ensure Accurate WIP Accounting

Implement systematic tracking, integrate eTIMS, and follow IFRS guidance. Ensure all expenses are documented and periodically reconciled. Maintain a WIP schedule for every project for tax audit readiness.

1. Maintain Detailed Project Schedules

   • Document all material, labor, and subcontractor costs by project.

   • Update progress regularly for percentage-of-completion calculations.

2. Use IFRS-Compliant Accounting Systems

   • Adopt accounting software capable of handling WIP, revenue recognition, and cost allocation.

   • Ensure reports can be exported for KRA audit requests.

3. Integrate eTIMS Validation

   • Record all supplier and subcontractor invoices via eTIMS to support deductions.

   • Review invoices before posting to WIP accounts.

4. Reconcile WIP Monthly

   • Compare accounting entries with physical progress reports.

   • Identify discrepancies early to prevent tax adjustments.

5. Prepare Audit-Friendly Reports

   • Maintain clear schedules for each project showing costs, progress, and recognized revenue.

   • Include supporting eTIMS invoices and contracts.

Learn more about our CFO Advisory Services for tailored construction financial management.

2026 Regulatory Updates Impacting WIP Accounting

WIP accounting in 2026 requires adherence to new KRA expense validation rules, full integration with eTIMS, and maintaining clear audit trails. Leveraging international standards with local expertise ensures compliance and audit readiness.

Key updates affecting WIP reporting:

• KRA eTIMS Validation: Expenses without eTIMS invoices are disallowed.

• Finance Act 2025 Amendments: Projects exceeding KES 5 million require detailed WIP schedules.

• SFAI Global Network Guidance: Ensures compliance with international accounting standards while adapting to local regulations.

• APP Tax Relief: Accurate reporting may qualify for partial tax deferrals, improving cash flow management.

Explore our Tax Compliance Services for support in aligning WIP reporting with KRA regulations.

Preparing for a KRA Audit on WIP

Maintain complete WIP schedules with supporting eTIMS invoices, document all project costs and progress reports, and ensure audit readiness to prevent penalties.

Steps for audit preparation:

1. Gather all invoices, contracts, and project schedules.

2. Ensure all expenses are eTIMS-compliant.

3. Reconcile accounting entries with actual project progress.

4. Produce clear reports showing WIP valuation, revenue recognition, and tax calculations.

Adamjee Training Services can provide workshops to equip your finance team with audit-ready WIP practices.

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