WIP Report - Percent Complete

Do you work or own a company in the construction industry? Maybe a general contractor or specialty trade? Chances are, you heard of ‘Work in Progress’, ‘Over/Under Billing’ or ‘Percentage of Completion’ and yes they are accounting terms. Your accountant may tell you what the numbers are and how to calculate them but do you know what it actually means and what it can tell about your projects and company?

If you haven’t seen my previous blog post on the overall WIP report, please check it out here. In that post, I talk about the various types of stakeholders that require the WIP report, why the WIP report is crucial for you as the business owner and the different components that make up this report.

In this blog, let’s go through 2 of the components:

• Percent Completed

• Gross Profit Earned to Date

Percent Completed

This is also known as Percentage of Completion and is one of the most commonly used terms in construction. If you use ‘Completed Contract’ method for your projects, Percentage of Completion won’t apply to you and you won’t be using the WIP report. Your accountant always say that you are 65% complete or 80% complete on this project but you have no idea what that is since you’re not an accountant. Luckily, you’re reading this post. If you’re an accountant and need help explaining this to non-accountants, you’re in the right place too.

What is Percentage of Completion Method?

Before we go into what it means, let’s summarize what the Percentage of Completion Method is. This method is only one of two accounting methods available for those in the construction industry. This applies to any industry with longer term contracts or projects but for the purposes of this blog, we will focus on the construction industry.

Without going too much into the accounting side of things, this method determines how much revenue and earnings to recognize in a certain period and is based on a project-by-project basis. It recognizes revenue and earnings systematically over the life of the project, from inception to completion.

Ways to Calculate Percent Complete

There are different ways to calculate the percent complete; the most common I’ve seen is the cost-to-cost method. You might be thinking, ‘why is it based on cost?’ and ‘it doesn’t make any sense’. The thing about Revenue is that it’s earned and the only way to earn it is by doing work which means you’re incurring cost. This is the formula:

% Complete = Costs Incurred to Date / Total Estimated Contract Costs

If you haven’t already, check out my previous blogs (links are in the formula above) that go into depth these two areas. If you notice, this calculation is based on an estimate so the only way this method can be used is if you can reasonably estimate your total contract costs.

Here is an example to cover the misconceptions of the percent complete:

The following scenario is for the same exact project.

Table to show an example of percent complete in both a project management and accounting perspective

I know what you’re thinking. They’re different! Actually, the only time when they are the same is when you have a new project that you haven’t started work on or you are completely finished with the project.

Column 1 is what your site supervisor sees while your accountant and project manager would see both columns. Although column 2 percent complete is higher than column 1, it could also work the other way depending on the circumstances. From a project management perspective, column 1 would be the numbers used but your financial statements would reflect numbers in column 2.

Gross Profit Earned to Date

This is exactly what it means, how much gross profit you have earned to date on a project. I won’t be going in depth in this because it’s straight forward.

This is the formula:

Gross Profit Earned to Date = Percent complete * Gross Profit

Let’s use the example from above.

Gross Profit Earned to Date = 13% * $30,000 = $3,900

Remember that Gross Profit equals Contract Value less Contract Cost.

In the next month, your percent complete becomes 20% and assuming the same gross profit, your gross profit earned to date is now $6,000. Congrats, you have earned an additional $2,100 in gross profit this month. As you complete the project, this number will keep increasing until you reach the gross profit of $30,000.

Your Turn

Both of the above is just an easy calculation but the inputs to get to the calculation is based on if you have a job cost system that is set up properly. Without this, you won’t have the visibility into the numbers and you won’t be able to make sound decisions. If you aren’t able to track what you’re buying, how much you’re buying and how much you have left to buy, how is the percent complete and your corresponding financials accurate?

If you would like to find out more about the different components of the WIP report, make sure to check out this article here.

At JTL CPA, our founder has just over nine years of experience in the construction industry (at the time of writing this article) with various general contractors and specialty trades, all the way to senior management. Our approach is unique because our solutions give you the ability to make sound decisions from good data. Check out our website here: www.jtlaccounting.com. 

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Until then, see you next time!

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