The Work-In-Progress (WIP) schedule for your construction project is a document of great importance – both to you and to your bonding agent. Many construction contractors don’t quite understand what the WIP schedule really offers, and thus lose credibility in the face of surety underwriters and bonding agents.
WIP Schedules Calculate Client-Side Costs Accurately
If you simply look at how much you billed your client and then subtract the costs of your construction contract, you should arrive at a clear profit or loss, right? That should work in theory, but in practice your profitability needs to be determined using a method of accounting called the Percentage of Completion Method (PCM).
This method relies on estimating the relative completion of the project by the contract’s actual price – not by your costs so far incurred. It then compares your actual expenditure to that sum and draws conclusions based off that information. In the worst-case scenario, the credibility of your entire company can be brought into question because you haven’t paid attention to what your project looks like from a WIP perspective.
Consider This WIP Schedule Example
Assume you have a $1 million construction contract and you estimate that your cost for completing the job is $600,000. At some point after you start the project, your bonding agent calls asking how much of the contract is complete. You’ve incurred $120,000 in costs, so you say you’re 20% complete with the job.
According to a surety underwriter, the amount you should have billed so far is $200,000 — 20% of the $1 million contract price. If you haven’t actually billed this exact amount, which is almost always the case, then the underwriter will use this information to determine the effectiveness of your capacity to estimate your jobs effectively.
So unless you happen to bill the perfect sum, you’ve either over-billed or under-billed your contract.
1. UNDERBILLING
If, in the above example, you’ve only billed $100,000, then underwriters will assume you have weak controls for project management. They might conclude that you’ll suffer from cash flow problems later on, and if you consistently underbill, they’ll doubt your ability to plan for projects. As a result, your bonding capacity will get tighter.
2. OVERBILLING
If you billed $250,000 in the above example, then you’re actually billing more than you should have. This is actually a plus for the bonding agent, who will interpret this as you anticipating the future needs of the contract and being better positioned to complete the job without any cash flow problems.
Use the WIP Schedule to Predict the Underwriter’s Response
If you’re using your WIP schedule effectively, you’ll be able to bill in accordance with the bonding agent’s expectations, adjusting prices and cost estimates in order to get the best response. Having your CPA review the WIP schedule prior to sending it out can be of enormous utility, helping you achieve this goal.