One of the greatest financial tools for a contractor is a Work-in-Progress (WIP) schedule. If you’re unfamiliar with it, a WIP schedule tracks the financial performance of ongoing projects using the percentage-of-completion method for recording revenue. It can be used to track job progress and profitability, over and under-billings, contract values, change orders, estimated costs to complete, and even backlog. That’s quite a bit of insight gained from one report!
In my experience preparing and analyzing WIP schedules across the industry, I’ve found some patterns of common mistakes. Thankfully, Dean Dorton’s Accounting & Financial Outsourcing (AFO) Construction team can provide resources for navigating the complexity of WIP schedules. Below is a summary of the mistakes I commonly see.
Treating the WIP Schedule as a Compliance Task
Too many contractors view the WIP schedule as a compliance tool, just another hoop to jump through at year-end for my CPA, surety, or bank. While it’s true that you will need a WIP schedule to comply with ASC 606 under GAAP, a WIP schedule is so much more than a compliance hurdle to jump through. An accurate WIP schedule can provide deep insight into job profitability, project cash flow, and historical data for project bidding. Consider the WIP schedule as another tool in your toolbox. Rely on it to make educated cost decisions and to hold team members accountable for project performance.
It’s worth mentioning that an accurate WIP schedule doesn’t come easy. It takes work to implement, maintain, and review. Invest the time to prepare the schedule. Dean Dorton’s AFO Construction team can lighten the load to implement, prepare, and analyze this report for your business’ success.
Using Inaccurate or Outdated Cost Budgets
Under the percentage-of-completion method, the estimated cost budget drives the entire calculation for recognizing revenue. If the budget is wrong, so will the rest of the schedule. Be sure to update cost budgets frequently. The accounting team should seek direct input from the project manager to better understand where job costs will land at project completion. The best practice is to schedule periodic meetings for the accountant and project manager to review this report at the individual project level.
Improper Change Order Management
Incorrectly reporting change orders on the WIP schedule can cause material swings and errors in job cost reporting. First, you must know when a change order amount should be added to the contract value. Does the change order need to be signed and approved or reasonably recoverable? Our team can help navigate this complexity.
Another common mistake is adding the change order to the contract amount but not adjusting the project’s cost budget. Be sure to adjust both. While this may appear to be an obvious mistake to avoid, it happens a lot.
Frequency in WIP Schedule Preparation
Not all contractors are the same; the frequency with which you prepare a WIP schedule will differ depending on your size and complexity. I usually recommend preparing and updating a WIP schedule as part of the monthly accounting close cycle. In some cases, this may not be feasible or time-worthy. At a minimum, I would expect to see a WIP schedule prepared quarterly so that surprises at year-end are minimized.
In determining the frequency of WIP schedule preparation, be sure to consider the project duration of your backlog. You’ll want to prepare a WIP schedule to measure results as the project progresses and frequently enough to allow time to make course corrections when necessary.
Not Reconciling the WIP Schedule to the General Ledger
To build trust in your WIP schedule, it’s critical to reconcile both revenue and cost to your general ledger. With a proper tie-out, users can more comfortably rely on the WIP schedule for project decision-making. Reconciliation can be simplified using a clean Chart of Accounts structure and a detailed work breakdown structure at the project level. Many ERP systems offer job costing modules that can simplify the process of tracking job costs. Be sure to leverage your technology to its utmost potential.
Focusing Solely on Profitability and Not Project Cashflow
The WIP schedule not only reports job profitability, but it can also be a tool to track cash flow at the project level. All contractors will want to analyze the underbillings and overbillings on their contracts, along with open accounts receivable and accounts payable at the project level. Underbillings result when the revenue earned through the percentage-of-completion method is greater than billings to date. Net underbillings mean work has been performed but not billed, which would cause concern and deserve deeper analysis. No contractor wants to act as a lender to the project owner. On the other hand, overbilling can occur when you’ve billed for more than the revenue recognized using the percentage-of-completion method. Being overbilled is advantageous because it acts as a way for the project owner to finance the project rather than the client. In fact, frontloading the project with higher profit recognition in the early phases of the job is common for this exact reason, as it provides the contractor with more working capital. However, contractors should ensure they are collecting cash on their overbilling promptly.
As you can see, managing WIP is a nuanced topic. If you feel a bit overwhelmed after reading the list above, that’s okay! With hands-on construction industry experience, our team can provide customized assistance that meets your company’s specific needs. We have the knowledge to implement, prepare, and analyze WIP schedules and act as a trusted advisor to your business. Please contact Dean Dorton’s AFO team if you would like to learn more about our service offerings for our construction clients.
