The purpose of a work in progress (WIP) report is to determine if current jobs are over- or under-billed. Construction accounting typically includes line items on both the balance sheet and the income statement that offer details on over/under billings determined by the WIP report. Over-billed projects appear to be additional revenue, whereas under-billed projects appear as a loss; based on the balance sheet, an accountant would categorize under-billed projects as short-term liabilities and over-billed projects as short-term assets.
Typically, there are three (3) main contributors to cost issues, including:
1. Failure to accurately monitor project progress
2. Aggressive up-front billing
3. A poorly maintained, inaccurate WIP report
Because an aggressive billing strategy is often necessary to offset payment delays, the first and third contributors on the list must be handled appropriately. However, issues often arise when aggressive billing practices throw off a basic understanding of job progress and estimated costs. A properly updated and maintained WIP report will solve this problem.
A WIP report is surprisingly easy to create and maintain and offers a host of benefits, including accurate profitability estimates. The single most important line item of the WIP is the percent-complete entry, as all other entries will be based on costs to date, budget requirements, and contract details. To determine earned revenue and profitability, the WIP multiplies percent complete against total contract value – if billed revenue exceeds earned revenue, you’re over-billed; if earned revenue exceeds billed revenue, you’re under-billed.
If your projects typically run more than four (4) weeks in length, developing and maintaining a solid WIP report is crucial. A WIP report shows you where your costs lie at the completion of a project, boosts your profitability, and allows you to successfully fund and manage future projects.