Project profitability is behind expectation, and your surety doesn’t seem to have the same confidence in you as before – what’s the issue here?
Chances are, you aren’t immediately aware of what the issue is. You’ll need to examine your Work-In-Progress (WIP) report to determine what conclusions the surety underwriter is coming to. Becoming familiar with the intricacies of your WIP report may not be a simple task, but it is one that can deeply improve your standing with your bond agent, and thus, your ability to take on bigger and more lucrative projects in the future.
Analyze the Right Data
The WIP report needs to include all revenues and costs for each contract currently signed. Importantly, this includes projects that you have not yet begun working on – if the contract is active, it should be listed in the WIP schedule.
Each contract then needs to be correlated to its total value, including the value of any currently signed change orders, and the estimated gross profit that it should produce.
Beyond this, your report may also show the original total estimated cost of each project. This provides you with an original snapshot of your expectations for the project and lets you clearly see how they have changed since then.
You may also include direct costs, indirect costs and revised cost estimates – these are all equally important windows into your mid-project financial state. They can illustrate whether your estimated profit has gradually faded over the course of the project.
This phenomenon, called profit fade, can strike your surety underwriter as an indicator that you are not budgeting your project correctly, or that you are mismanaging the project.
Underbilling and Overbilling
Beyond these data, your WIP report will also need to include all billings to date and a comparison between billings and revenue thus far recognized. You must determine whether you are underbilling or overbillingfor the revenue thus far received. Underbilling indicates financial mismanagement and possible cash flow issues, while slight overbilling is a plus from the underwriter’s point of view.
If you notice consistent underbilling in your WIP report, you will want to review your estimating process carefully. It indicates that you may be estimating costs poorly or improperly evaluating the amount of time it takes your employees to finish tasks.
Overbilling, on the other hand, creates the impression that you are planning ahead for possible obstacles on the way to project completion. It indicates that you should have no cash flow problems for the foreseeable future.
Of course, significant overbilling may look like you are borrowing against the job – again creating the appearance of a cash flow problem. Since surety underwriters are responsible for determining how much bonding is available to your construction company, maintaining a highly organized and well-written WIP report is of crucial importance.