Contractors use work-in-process (WIP) schedules to measure revenues and gross profit so bankers, bonding agents, and underwriters can view project profitability on a project-by-project basis. WIP schedules also act as reassurance that revenue, contract costs, under billings, and over billings will reconcile to the profit and loss statement as well as the balance sheet.
However, the WIP schedule allows contractors to do more than just track financial performance of unfinished projects; the best WIPs strategically monitor KPIs and enable executives to find issues affecting profitability, leading to better information for decision-making.
There are seven primary KPIs monitored in a typical WIP schedule. The first KPI measured is a project’s total estimated costs – that is, the approximation of the cost of the entire project. Contractors who can accurately estimate project costs up front will see less profit fade down the road.
What is profit fade and how does it affect my project and/or business?
Profit fade occurs when the profit from a job is less than expected and can often be traced to six causes, including:
- Overly optimistic production and/or unit cost estimates
- Underestimated labor or equipment costs
- Poor supplier/subcontractor performance
- Insufficient field supervision, resources, or employee training
- Unbillable change orders or additional work
- Inclement weather conditions
The ability to identify and manage profit fade starts with a stable project budget and workflows that allow for reliable and consistent reporting. Reports should include current costs and job progress that can easily be compared to the original estimate, allowing for quick identification of project differences and adjustments early on.
Although it’s rare for projects to be completed exactly as planned, project managers can manage changes as they occur and make adjustments to keep projects on track as closely as possible. This responsiveness demonstrates to underwriters, loan officers, and others with access to financial statements that the company recognizes the importance of accurate cost estimation and has processes in place to identify and combat profit fade to lessen its negative effect as projects move toward completion.