Construction companies are in the best position to produce profits when carefully and efficiently organized. The key to effective organization is a detailed schedule, and the construction industry’s preferred scheduling format is the Work-In-Progress (WIP) schedule. This is because it offers more than a simple series of dates by which certain project milestones should be complete.
The WIP Schedule Is a Tool for Achieving Profitability
When implemented correctly, the WIP schedule is a tool that reveals inefficient processes in the construction project and gives management a clear insight into factors that affect profitability. Regular analysis of the WIP schedule allows decision-makers to focus resources on areas of profitability.
For example, it is possible to use a WIP schedule to determine that projects of a certain size consistently produce more profit than others, or that there is a pattern of profitability adhering to a certain location. You may discover that key members of your team contribute to profitability more than expected. However, to obtain these benefits, you must spend the time and energy necessary to craft a professional WIP schedule.
Elements That Constitute a Successful WIP Schedule
The main purpose of the WIP schedule is providing a profitability snapshot of your construction project at any point during the project lifecycle. It offers a vantage point from which you can identify and analyze performance indicators on a project-by-project basis.
Your WIP schedule should track the following indicators for the duration of every project:
- Contract value
- Cost incurred to date
- Total estimated costs
- Project billing
- Project burden
- Backlog
These are further classified into statements that your CFO, financial controller, or accountant can organize into a coherent picture of your job performance.
Using a WIP to Catch and Prevent Job Borrow
Job borrow is the act of billing more than the costs incurred to date on a particular project, specifically when the difference is in excess of the total gross profit the project earns you. At this point, you are overbilling for the job in question, and your client’s sureties will conclude that you are borrowing from the job to pay for another.
While overbilling within reasonable bounds can be healthy for cash flow, it becomes an increasingly worrisome issue as the sum approaches the actual sum you’d earn as profit on the job itself.
Working Burden Into the WIP Schedule
Burden refers to all of the indirect costs of performing daily operations for your construction project. For example, depreciation on fleet vehicles and the cost of vehicle fuel typically fall into the burden category. Your WIP schedule needs to incorporate realistic burden rates in order to offer useful insights into your project’s profitability.
Without burden allocation, your total gross profit as stated in your WIP will be different than that on your Profit and Loss Statement (P&L). This will cost you in credibility and in reputation while making your WIP less effective than it could be. Take the time to add in all relevant factors and you’ll have a powerful schedule for realizing and maintaining profit consistently.