Track Your WIP to Improve Financial Performance

Track your WIP and produce more accurate forecasts.

sage 300 forecasts
As a professional construction contractor, you’re certainly aware of the benefits that a well-thought out Work-In-Progress (WIP) report can offer you. Properly tracking the data that the report offers can help you save money and be more efficient – but what is the best method for tracking and reporting this data?

Reporting Revenue from Contracts with Customers

As of Fall 2010, The Financial Accounting Standards Board, in collaboration with the International Accounting Standards Board, have published industry-wide guidelines for reporting revenue from contracts with customers. These rules establish uniform standards for recognizing revenue – specifically, companies only recognize revenue from the transfer of goods or services to a customer.

Under the previous method, called the percentage-of-completion method, both revenues and expenses were recognized using rates over the contract’s duration. Typically, this would be compared against some reliable measure of progress, such as costs incurred to date. Alternately, contractors could recognize project revenue and expense after the contract is complete.

In neither case is there a clear set of conditions for only recognizing revenue. Now, contractors are obligated to do so, giving them the ability to track this important WIP factor and use it to improve project efficiency.

Identifying and Tracking Performance Obligations

Performance obligations are any agreements to provide a good or service to a customer. In construction, these indicate distinct contract items that are separate from one another. Under the current system, construction contractors follow a five-step process for applying its revenue-centric rule structure:

1. Identify the contract.

2. Identify each individual performance obligation within the contract.

3. Determine the price of each transaction.

4. Allocate the correct transaction price to each performance obligation.

5. Recognize revenue after each performance obligation is satisfied.

The the second and fifth steps are the most challenging for construction contractors. Distinguishing between interrelated performance obligations can be difficult, but the more time you spend clarifying and categorizing these differences, the better positioned you will be to examine factors affecting performance.

When it comes to recognizing revenue, the key to defining this moment is when the customer obtains control of the good or service rendered. For construction projects and performance obligations in construction contracts, this can be defined as any one of the following:

  • The customer holds legal title to the good.
  • The customer is physically in possession of the good.
  • The customer has an unconditional obligation to pay.
  • The design, function, or service is customer-specific

If you can demonstrate all the above points, then you are in a good position to recognize revenue from the customer. This is similar to how the percentage-of-completion method works, but it focuses on individual performance obligations rather than the contract as a whole.

With this method of revenue recognition firmly in place, you can more capably identify issues with your bonding relationships – potentially alerting sureties to potential problems and your method for addressing them.