WIP Report - Contract Value, Cost, Gross Profit

Construction

Nov. 8

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 3 of the components:

Contract Value
Contract Cost
Gross Profit/Margin

Contract Value

This is the value of the contract you have with your customer. If you don’t use contracts with your customers, I highly recommend you do since it outlines the responsibilities and deliverables of all relevant parties. Your customer could be an end user, general contractor, subcontractor or just about anyone who you do project related work for.

To utilize the WIP report, you would need a contract with your customers or another document confirming the value of the work that both parties have agreed to. There are different types of contracts that are common in the industry such as fixed price, cost plus or unit price but the idea here is the same.

This contract value from the original contract is the starting point in this report. The only time this number will change is if there are changes to project scope and if agreed by both parties, turn into a change order. This could increase or decrease the contract value. The WIP report is done on a recurring basis like monthly so make sure to incorporate the most up to date numbers.

As you can tell, it’s very easy to get this number.

Contract Cost

This is how much it will cost you to complete the project and it’s a lot more complicated than contract value. The reason is that it’s just an estimate. It will always be an estimate unless you complete the project and know the actual costs. An estimate is highly subjective and biased so the numbers may not truly reflect what could happen. This could skew your financial results from one period to the next. It’s extremely important that this number is as accurate as possible at a given point of time.

Hopefully when you bid the project, you have developed a detailed cost estimate. If not, how did you determine what price to bid at? At the beginning, it will be hard to accurately estimate what the cost could be due to uncertainty so this detailed cost estimate would be the starting point in this report.

As you complete stages of the project, some of the uncertainty becomes certain. Maybe there are scope changes as mentioned earlier in the post, you may need to issue a change order to a supplier or subcontractor. After this at every interval, a detailed cost to complete estimate should be done. Review your previous estimate, go through each cost item, variances against budget, change orders/committed costs and other costs that may occur. Your actual cost plus the estimated cost to complete equals to your contract cost.

Gross Profit/ Margin

Gross Profit is the difference between the Contract Value and Contract Cost. Gross Margin is the Gross Profit as a percentage of the Contract Value which is also known as GP %. This number or percentage reflects how much profit your project will make when the project is complete. The higher the number or percentage, the more profitable the project is.

Example

You signed a contract with your customer for $10,000 to form and pour a concrete slab for a light post. Your detailed cost estimate is $8,000 to complete the project. Two months later, the customer requested to increase the size of the concrete slab, both has agreed that it will be $5,000 and a change order was issued. This extra size will cost you $4,500. Three months later, you were able to save $600 since you found an alternative concrete supplier.

What does this mean?

When the customer requested for the concrete slab to be bigger, you were able to make an additional $500 profit on the project, however, the Gross Margin decreased by 3%. This indicates that the change order you received was not was profitable compared to when the contract was signed.

In the third month, the contract value doesn’t change because there is no change in scope. The savings you found helped you generate an additional $600 in profit and the Gross Margin increased by 4%. The project is now more profitable than at the beginning. Great news for you!

Now, rinse and repeat for all the projects you have.

This was a very quick and simple example but imagine you have a bigger project, many scopes of work or even if it takes multiple months or years to complete, determining an accurate Contract Cost at a given time takes some effort.

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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Thank you for making it to the end of the blog post! If there are topics that you would like to learn more about in the future, please let us know down in the comments.

Until then, see you next time!

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