WIP Report - Billings & Cost to Date

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 and the various components, 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:

• Billings to Date

• Costs Incurred to Date

Billings to Date

Billings, also known as Progress Billings, are requests for payment (invoices) that are sent to the customer throughout the lifecycle of each project. Depending on the contract you have with your customer and the size of the project, that frequency might be monthly, based on milestones, a fixed amount per billing period or even at the end of the project. If the contract doesn’t specify invoicing timelines, it is assumed to be a monthly invoice. Keep in mind that a contract also includes an executed purchase order or approved quote.

This would apply for all companies in construction, you could be a sub-subcontractor working for a subcontractor, subcontractor working for general contractor or even general contractor working for a client. This path is quite common for most projects.

Importance of Billings

The great thing about Billings is that this is when you receive cash inflow to fund your company’s operations. We all agree that cash is the lifeline of the company and without it, it will be difficult to continue. There are a number of stories where construction companies went bankrupt or closed down due to the lack of available cash since they weren’t paid on time. Even with the Construction Act that got revamped in 2018 with the addition of prompt payment legislation, it’s still an issue. Companies somewhere down the path (Client to General Contractor to Subcontractor to Sub-Subcontractor) are struggling.

Your company’s processes could include sending an Application for Payment which is like a draft billing breakdown sent for client approval before the invoice is sent or you could just send the invoice with the billing breakdown. Either way, it’s crucial that this gets sent on time for the reasons above.

Billing Breakdown

What does a billing breakdown actually look like? I’m sure you are already familiar with it since you are in construction so I won’t go into this too much. This is best explained with an example.

Example: Project #123 School Classroom Addition- $5,000 for electrical, $4,000 for mechanical, $2,000 for finishes, total contract value $11,000

This is the first month of the project, you are billing $2,000 for Electrical, $2,000 for Mechanical and $1,000 for Finishes for work completed so far.

Sample Billing Breakdown for Month #1

This is the second and final month of the project and you are billing the remaining contract.

Sample Billing Breakdown for Final Month

For the purposes of the WIP report, in the 1st month, the billings to date is $5,000 and for the 2nd month, the billings to date is $11,000. Although I didn’t mention about Statutory Holdback (maybe I will create a blog on this topic in the future), the holdback has nothing to do with the billings to date. If there was a 10% holdback on the 1st month invoice, you are still billing for $5,000 on the contract.

If the duration of the project is between 2 or more fiscal years, this billings to date is the cumulative billings to date on the project.

If you have a construction accounting software that does progress billings, populating the billing breakdown, generating the invoice and getting the billings to date number is very easy. This was an overly simplified example but it’s the same idea for more complex projects and different types of contracts (lump sum, unit price, etc)

Is this what is being done in your current company?

Costs Incurred to Date

Since I mentioned about the billings above, it’s important to talk about the other side: Costs

What exactly does ‘costs incurred’ mean? Incurred, according to the Merriam-Webster dictionary, means ‘to become liable’. In other words, costs that you are liable for even if you haven’t received an invoice from a vendor or supplier. That means you are using Accrual Based Accounting. If you’re not sure what this is, make sure to contact your Accountant.

Examples of Costs Incurred

These are all examples of costs incurred on a project:

• You have an employee who coordinated the delivery of toilets for the rental (both payroll costs and toilet rental would be costs incurred)

• A supplier has delivered a back-up generator to site but haven’t invoiced yet (the cost of the generator would be costs incurred)

• Your electrical subcontractor connected the back-up generator to the main breaker panel and sent an invoice to you (the costs for subcontractor would be costs incurred)

• Your excavation subcontractor did not perform any work and did not invoice you (this one is a trick, costs were not incurred. Hopefully you caught on when you were reading through this)

Your next question might be, what about holdback? Actually, holdback is not considered a cost at all so it’s excluded from the above. It’s important when you pay your subcontractors since you can hold back a portion of their invoice. Again, I won’t go into holdback that much (same as above, maybe I will create a blog on this topic in the future).

When Costs Incurred is an Estimate

If you have a construction accounting software that tracks costs by project, getting the costs incurred to date number is very easy. But wait, this number only consists of invoices or costs actually posted to the accounting software. What about the costs that are incurred but we haven’t received an invoice yet?

Many companies might do something different as there is no one correct way. How do you actually know what the cost is before you receive an invoice? A lot of the times, you don’t so it’s just an estimate. It can’t be a random guess since that would be artificially increasing or decreasing the costs incurred to date which affects the WIP report.

If you received an invoice but it’s not posted yet, that’s easy because you can just take the number. For costs that you haven’t received an invoice, it’s important that the costs incurred is based on some measure you can quantify reliably. For example, if your excavation contractor is installing 50 helical piers at $50 each per the contract and you know they completed 25 of them this month, you can reliably estimate the cost.

If the duration of the project is between 2 or more fiscal years, the costs incurred to date is the cumulative costs to date on the project.

Your Turn

All of this is easier 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 and how much you’re buying, how do you know how well you have bid the project?

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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