As a professional construction contractor, you already know that your WIP report is instrumental in demonstrating your project planning and financial capabilities. Completing this report once per month gives you the best chance of catching inefficiencies in your construction project.
Once identified, you are then in a position to address those inefficiencies before your surety underwriter uses them to draw conclusions about your ability to complete the project within the scope of its original estimates. You may be able to compensate for rushed or delayed supply orders or review your estimate in light of new, unforeseen conditions at the work-site.
Doing any of these things, however, requires a clear understanding of the metrics your WIP uses.
WIP Metrics
1. TOTAL ESTIMATED COST
This is the estimated cost of the entire project. It is subject to change and it can be useful to include the original sum as planned for before the project began. This will help you identify profit fade.
2. TOTAL ESTIMATED REVENUE
One of the major changes to occur in construction site budgeting in recent years is the introduction of performance obligation-based revenue recognition. This means that when using the percentage-of-completion accounting method, you have to separate revenues and expenses, recognizing revenues only from the transfer of goods or services to your client.
3. TOTAL ESTIMATED PROFITABILITY
This is where you will clearly see any profit fade as it occurs throughout the lifecycle of your project. You may also find profit gain – the situation when profit expectations rise due to smoother-than-expected worksite productivity. In either case, you want to be able to clearly calculate the result.
4. REVENUE EARNED TO DATE
Knowing how much revenue you’ve earned so far is key to understanding whether you are underbilling or overbilling your client.
5. ESTIMATED COST TO COMPLETE
As a running estimate, this should correlate to the difference between the total estimated cost and all costs spent on the project to date
6. ALL COSTS SPEND ON PROJECT TO DATE
This, along with your billing history, will let you know whether you are accurately billing for the services you’ve so far rendered.
7. COMPLETED BILLINGS TO DATE
Using this with the rest of the information mentioned above, you’ll be able to determine if an underwriter sees your project as a cash flow liability. If you’re consistently underbilling, for instance, it might indicate trouble down the line.
HAVE A CPA CHECK YOUR WIP REPORT
If you’re concerned about what a surety underwriter will uncover upon examining your EIP report, give it to a professional CPA for review. This will give you the information you need to address potential problems before your bond agency decides to take matters into its own hands.