Construction Work in Progress Report
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?
This is very common in the construction industry and different stakeholders require a Work in Progress (WIP) Report to support your financial results. These may include creditors, investors or surety companies. Keep in mind that different stakeholders may call the WIP Report a different name but the function is the same.
WIP for Stakeholders
The WIP Report has many parts to it but before we get into that, why are your stakeholders requiring this? It’s even possible that some stakeholders want you to change how you do your accounting to match their requirements.
This report is important for them to understand:
How your projects are doing financially
The risk level of your projects
Project cash flow
Your company’s backlog
WIP for Business Owner
Since you work or own a company in the construction industry, this report is more important for you. Why?
In addition to the above, you can also:
Foresee potential issues with projects
Forecast how your projects will do at the end of the year
Forecast how your company will do at the end of the year, etc.
Notice how these are all future oriented?
Components of a WIP Report
This will only be a high-level summary since each of these items could be a separate blog post.
Contract Value – the value of the contract you have with your customer
Contract Cost – how much it will cost you to complete the project
Gross Profit/Margin – the difference between the Contract Value and Contract Cost
Billings to Date – how much you have billed your customer in a specified time period
Costs Incurred to Date – how much you have spent on the project in a specified time period
Percent Completed – How much percent you have completed on the project based on the above numbers. Keep in mind that this is not based on how much % you have billed your customers.
Gross Profit Earned to Date – how much you have earned in a specified time period based on the % completed
Overbilling – amount that you have billed the customer but haven’t earned yet
Underbilling – amount that you have incurred and earned but haven’t billed the customer yet
Example
Here’s an overly simplified example:
Contract Value - $1,000
Contract Cost - $800
Gross Profit - $200
Billings to Date - $100
Costs Incurred to Date - $40
Percent Complete – Costs Incurred to Date / Contract Cost = $40/$800 = 5%
Gross Profit Earned to Date – Percent Complete * Gross Profit = 5% * $200 = $10
Overbilling – Billings to Date - Percent Complete * Contract Value = $100 – 5% * $1,000 = $50
Underbilling – doesn’t apply in this case, it’s either overbilling or underbilling but not both
It’s not hard to do this calculation, it took me one minute to write out the above example.
What does this mean?
This calculation is based on historical data meaning that it has already happened. In the past. What’s more important is the future because it hasn’t happened yet. Remember what I mentioned above? This WIP report is more important for you because it can help you foresee or forecast. Future-oriented words.
Your Turn
In your own organization, do you have visibility into what the WIP report is trying to tell you? If you do, that’s great, keep going. If you’re not sure or have no idea, it’s time to look for a solution that can help you bridge the gap. If you currently don’t have something like this but would be interested in setting something up, make sure to reach out to an accountant who knows the industry.
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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