Construction Completion Capital: Essential Financing for Final Project Phases

Construction projects often hit a snag when initial funding dries up before the work is finished. Construction completion capital is specialized financing that gives you the funds to finish a partially completed building and move it toward generating value.

This type of funding helps developers and property owners avoid the headache of an unfinished building just sitting there, losing value.

When a project stalls because of money issues, you're looking at some serious financial risks. The property can't be sold, can't be rented, and might even start to deteriorate.

Construction completion capital puts money back into the project so you can finish the job, protect your investment, and actually turn the project into something useful.

Knowing how this financing works can help you make better decisions about your construction projects. You need to know what costs count, how to track your spending, and when to capitalize those costs on your balance sheet.

The right approach to construction completion capital can be the difference between a failed project and a solid investment.

Key Takeaways

• Construction completion capital covers the gap when initial financing runs out.
• Proper tracking and capitalization of construction costs help you keep accurate records and project value.
• Understanding your financing options and managing costs can help you finish projects and dodge expensive delays.

Understanding Construction Completion and Capitalization

Construction completion marks the point when a capital project shifts from an asset under construction (AUC) to a fully operational fixed asset. This triggers some important accounting changes, like starting depreciation and ending cost capitalization.

Defining Construction Completion

Construction completion happens when a project hits substantial completion and is ready for its intended use. You don't have to wait for every last inspection or tiny detail.

Your project is complete at the earliest of these:

• Signing substantial completion contract documents
• Occupying the building or facility
• Placing the asset into service

Substantial completion means your asset works as designed, even if there's still some finishing work left. For example, an office building is good to go once employees can work safely, even if the landscaping isn't done.

Once you hit this point, you stop adding costs to the Construction in Progress (CIP) account. Any leftover expenses become operational costs and show up as current period expenses.

Capital Projects and Qualifying Assets

Capital projects are long-term construction efforts that create assets you'll use for more than a year. These projects have to meet certain criteria to qualify for capitalization.

Qualifying assets include buildings, infrastructure, equipment installations, and major improvements. Your project needs to meet minimum capitalization thresholds, usually between $5,000 and $50,000, depending on your organization.

You can capitalize direct costs like:

• Materials and supplies used in construction
• Labor costs for workers building the asset
• Permits and fees for the project
• Interest on construction completion loans during the active building period

You can't capitalize indirect costs like general overhead, admin expenses, or anything spent after completion. Those go right to your income statement as period costs.

Asset Under Construction versus Completed Assets

Assets under construction (AUC) and completed assets get different accounting treatment. This affects your balance sheet and how you calculate depreciation.

While under construction, your asset sits in the CIP account within Property, Plant, and Equipment. No depreciation happens during this phase because you're not using the asset yet.

Once construction is done, you move the total costs from CIP to the right fixed asset category. Depreciation starts then, based on the asset's useful life and your chosen depreciation method.

Here's a quick comparison:

Capitalization Policies and Relevant Accounting Standards

Organizations have to follow specific accounting standards to decide which construction costs to capitalize and when to move completed assets out of construction in progress accounts. ASC 360 and ASC 835 set the main rules, and componentization matters for breaking down and recording asset pieces.

Overview of Capitalization Policies

Your capitalization policy sets the minimum dollar amount and criteria for recording construction costs as assets, not expenses. Most organizations use thresholds between $5,000 and $25,000 for each asset or component.

You should capitalize costs that directly help get an asset ready for use. This covers:

• Labor costs for construction workers and contractors
• Materials and supplies used in construction
• Engineering and architectural services
• Permit fees and inspection costs
• Site preparation expenses

Your policy should define asset categories and useful life assignments. Projects below your capitalization threshold get expensed right away, even if they involve capital improvements.

Key Guidance: ASC 360 and ASC 835

ASC 360-10 covers accounting for property, plant, and equipment, including construction projects. It says you have to capitalize costs that add productive capacity or extend an asset's useful life.

ASC 835 focuses on interest capitalization during construction. You must capitalize interest costs while you're actively preparing the asset for use.

The capitalization period starts when you begin construction and ends when the asset is substantially complete and ready for use. You figure out capitalizable interest by applying your weighted average interest rate to the average accumulated expenditures during construction.

Only interest on debt directly tied to construction qualifies. If construction stops for a while, you have to pause interest capitalization.

Componentization and Placed-In-Service Criteria

Componentization means you have to separately identify and capitalize big parts of an asset that have different useful lives. For example, a building might have a roof, HVAC, elevators, and structural elements, each with its own depreciation timeline.

The placed-in-service date tells you when to stop capitalizing costs and start depreciation. Your asset hits this point when it's substantially complete and ready for its intended use.

Physical occupancy often sets this date, but you can place an asset in service before everything is 100% done if it's operational. You move the asset from construction in progress to its final asset category when it's substantially complete or when you start using it.

Managing Construction in Progress (CIP) Accounts

CIP accounts act as holding places for construction costs until your project hits substantial completion. You need to set up these accounts right, track costs during the build, and know when to transfer balances to your fixed assets.

Structure of the CIP Account

Your CIP account shows up on the balance sheet as a non-depreciable asset under the property, plant, and equipment section. This account has a debit balance that grows as you add construction costs.

You should organize your CIP account so each project gets tracked separately. That usually means creating individual sub-accounts or cost centers for each construction project.

Each sub-account should capture three main cost categories:

• Direct labor - wages for workers building the asset
• Direct materials - supplies and components
• Overhead costs - equipment rental, utilities, and indirect expenses

The account also holds capitalized interest if your project qualifies. You calculate this based on the average amount of accumulated expenditures during construction.

Cost Accumulation During the Construction Phase

During construction, you charge all project-related costs to the CIP account, not current period expenses. You need to screen invoices as they come in to decide what belongs in CIP versus operating expenses.

Costs you capitalize in CIP:

• Construction materials and supplies
• Labor directly tied to the project
• Professional fees for architects and engineers
• Permits and inspection fees
• Interest on construction completion financing

Costs you expense immediately:

• General administrative overhead
• Marketing expenses
• Training costs for future operators

You record CIP charges with a debit to Construction in Progress and a credit to cash or accounts payable. When you get a completion loan or construction financing, the proceeds fund your growing CIP balance.

Transfers from CIP to Fixed Assets

You move your CIP account balance to fixed assets when the project reaches substantial completion and is ready for use. This timing matters because depreciation only starts after the transfer.

Substantial completion means the asset can do its job, even if some minor work remains. You shouldn't wait for every last detail or final payment to contractors.

The transfer entry debits the right fixed asset account (building, equipment, land improvements) and credits Construction in Progress. You then start depreciation based on the asset's useful life and your chosen method.

If you drag your feet on this transfer, you'll understate depreciation expense and overstate net income. Auditors notice CIP accounts that stay open long after a project is done.

Capitalized Costs: What to Include and Exclude

Knowing which costs to capitalize during construction affects your balance sheet and when expenses hit your income statement. Labor, materials, equipment, and some indirect costs qualify for capitalization, but general admin expenses and costs after completion don't.

Criteria for Capitalizing Construction Costs

You can capitalize costs that directly help get your construction project ready for use. This includes labor for workers on site, raw materials and supplies, and equipment purchases or rentals used just for the project.

Transportation and freight costs for moving materials to your site also count. Subcontractor fees are in, since they directly support project completion.

Storage costs can be capitalized if they're specific to your project, not just general warehouse expenses. Permits, engineering services, and certain overhead costs tied directly to the construction work also qualify.

What to exclude: General admin costs, corporate overhead not tied to the project, and anything spent after construction can't be capitalized. Employee training costs and routine repairs get expensed right away.

Borrowing Costs and Capitalized Interest

You can capitalize interest on loans taken specifically to finance your construction project. This only applies during the active construction period when you're actually spending money to build the asset.

Interest capitalization stops once construction is substantially complete and the asset is ready for use. After that, all borrowing costs get expensed on your income statement.

To do this right, you need to track which borrowed funds went straight to the project. The capitalized amount can't be more than the actual interest you paid during construction. This capitalized interest becomes part of your property, plant, and equipment (PPE) value and later factors into depreciation.

Indirect Costs, Testing, and Commissioning

Some indirect costs can be capitalized if they're necessary to get your asset ready for use. Insurance premiums covering the construction period qualify. Employee benefits and payroll taxes for workers building the project also count.

Testing and commissioning costs get capitalized because they make sure your asset works as intended. This includes system testing, performance checks, and safety inspections you need before the facility can be used.

Once testing confirms the asset works and construction is substantially complete, you stop capitalizing costs. Any fixes or changes after that get expensed immediately. Depreciation starts when the asset is ready for use, spreading the total capitalized cost over its useful life.

Key Milestones and Documentation in the Completion Process

Capital construction projects need careful tracking of specific milestones that trigger financial and operational changes. The move from construction to operational asset involves clear periods for capitalization, formal commissioning activities, and documented proof that facilities are ready for use.

Construction Period and Capitalization Period

The construction period starts when you break ground. It keeps going until your project reaches substantial completion.

During this time, you rack up costs that will become part of your capital asset value. Your capitalization period can stretch beyond the end of physical construction.

It covers the time needed to get your asset ready for its intended use. That means you’ll capitalize interest, labor, and overhead costs during this phase.

Key activities during these periods include:

• Tracking all direct construction costs
• Recording indirect costs like permits and legal fees
• Documenting interest on construction loans
• Monitoring progress against your budget

You’ve got to keep detailed records of when costs happen. Good documentation backs up your capitalization decisions and helps auditors check that you followed accounting standards.

The capitalization period wraps up when your asset is substantially complete and ready for use, even if there’s still a bit of work left.

Commissioning and Certificate of Occupancy

Commissioning signals the shift from construction to operational readiness. The commissioning team tests all building systems to make sure they work as designed and meet the right specs.

They’ll check HVAC, electrical, plumbing, fire safety, and other important infrastructure. You’ll get formal paperwork showing each system passed inspection.

The certificate of occupancy is official approval from local authorities. It proves your building meets all code requirements and is safe for people to use.

You can’t legally occupy the building without this certificate. It’s your proof that the construction meets the minimum safety and health standards for your area.

Signaling Readiness: Placed-In-Service and Audit Trail

The placed-in-service date tells you when your asset is ready and available for its intended use. This is when you stop capitalizing costs and start recording depreciation.

Your audit trail should clearly back up this date. Keep substantial completion certificates, final inspections, occupancy permits, and records showing when operations actually began.

Essential documentation for your audit trail:

• Substantial completion certificates
• Final punch list and completion dates
• Certificate of occupancy
• Commissioning reports
• Move-in dates and operational start records

You’ll need these documents to defend your capitalization decisions during audits. Missing or fuzzy records can lead to adjustments that hit your financials and tax positions.

Financing Strategies and Exit Considerations

Construction completion financing takes careful planning. You need to secure capital and figure out your next steps once the project finishes.

Your financing strategy should factor in the property's future value and have a clear plan for paying back loans.

Construction Completion Loans Overview

Construction completion loans give you the capital needed to finish partially completed projects. These loans focus on the final stages, when you need extra funding to wrap things up.

Lenders look at your project’s current state and the work left to do before approving the loan. You usually need this type of financing if your original funds run out or if you buy an unfinished project from someone else.

The loan covers labor, materials, permits, and other costs needed to make the property ready for occupancy or sale. Terms differ from standard construction loans.

Lenders want detailed documentation of existing work, updated cost projections, and proof you can finish the project on time.

Role of After-Repair Value (ARV) in Financing

The after-repair value (ARV) is what your property should be worth when it’s finished. Lenders use ARV to decide how much money to lend.

Most completion loans fall in the 65% to 75% range of the projected ARV. You figure out ARV by looking at similar properties nearby.

Lenders will order an appraisal to double-check your ARV before approving the loan. A higher ARV can get you more financing and better terms.

Getting ARV right is pretty important. If you overestimate, you might run out of money; underestimate, and you could borrow less than you should.

Exit Strategy Planning

Your exit strategy spells out how you’ll pay back the construction completion loan when it matures. Lenders want to see this plan before they approve you.

The main options are selling the finished property, refinancing into permanent financing, or using rental income to cover long-term debt. Selling gives you quick cash but might trigger capital gains taxes.

Refinancing lets you keep the property and maybe defer taxes with a 1031 exchange. Each exit needs a different approach.

Sales require good market timing and buyer readiness. Refinancing needs solid property performance and the ability to qualify for a long-term loan. Your choice depends on market conditions, investment goals, and tax factors.

Frequently Asked Questions

Project teams and finance folks run into a lot of the same issues when dealing with construction completion capital. Here are some common questions about accounting, capitalization, depreciation, documentation, project closeout, and working capital.

When should project costs be reclassified from construction in progress to fixed assets?

Move costs from construction in progress (CIP) to fixed assets when the asset is substantially complete and ready for use. This applies even if you’re still waiting for final invoices or finishing up small details.

Once you can occupy or operate the asset, it’s considered ready—even if you haven’t actually started using it. Don’t delay the transfer just to avoid starting depreciation.

Which costs are eligible to be capitalized during a building or major improvement project?

Capitalize all costs directly tied to getting the asset ready for use. That covers materials, labor, permits, architectural and engineering fees, and legal costs linked to the project.

Site prep, excavation, and foundation work also count. Equipment rental used just for construction can be capitalized too.

You can capitalize interest on loans during active construction. Stop capitalizing interest when the asset’s ready for use.

Skip capitalizing general admin overhead, marketing, or training costs for staff who’ll use the new facility.

How is depreciation calculated once a newly built asset is placed in service?

Depreciation starts the month you place the asset in service—not when you started building or paid for it. Use the total capitalized cost transferred from CIP to figure it out.

Pick a useful life based on the asset type and your company’s depreciation policy. Buildings usually use 27.5 to 39 years; improvements might use 5 to 15 years.

The straight-line method divides the cost by the useful life for annual depreciation. Accelerated methods are an option if they fit how the asset loses value.

What documentation and approvals are typically required to support capitalizing project expenditures?

You’ll need a board resolution or management sign-off approving the project and budget. That shows intent to create a capital asset.

Vendor invoices, contracts, and payment records back up the costs you’ve incurred. Keep a detailed project ledger that tracks spending by category.

Time sheets and payroll records support internal labor you capitalize. Change orders need written approval before you add them to the capitalized amount.

Include the date the asset was placed in service and who made that call. Many companies want a project completion certificate signed by the project manager and finance director.

How should change orders, retainage, and punch-list items be treated for capitalization and closeout?

Add approved change orders to your capitalized costs if they happen before the asset is in service. Record them in CIP when approved, not when paid.

Retainage is what you hold back from contractors until the project’s done. Include retainage in capitalized costs when the work’s performed, and set up a liability on your books.

Minor punch-list items won’t stop you from placing the asset in service or starting depreciation. Add those final costs to the fixed asset account once completed if they’re small.

If punch-list work is significant and affects how the asset functions, wait to place it in service. Keep those costs in CIP until the work wraps up.

What is the standard approach to calculating working capital for a construction company?

Working capital is just your current assets minus your current liabilities. For construction companies, that usually means cash, accounts receivable, inventory, accounts payable, and whatever debt payments are coming due soon.

Construction businesses often need higher working capital ratios than other industries. The timing of project payments can really throw off your cash flow.

You typically want enough working capital to cover 60 to 90 days of operating expenses. That’s a solid buffer, but honestly, it’s not always easy to maintain.

Lenders check your working capital to figure out if you can keep things running while you wait for project payments. A ratio of 1.2 to 1.5 (current assets compared to current liabilities) is pretty standard for healthy construction firms.

If you’re taking on bigger projects or juggling several jobs at once, your working capital needs go up. You’ve got to cover material purchases, payroll, and subcontractor payments—sometimes long before you see a dime from property owners.