Forecasting with Cabbage and Sage 300: The Standard for Your Success as a Contractor
Work in progress (WIP) reports are the yardstick that bankers, bonding agents, and surety underwriters use to measure your financial success or failure as a contractor, as explained by construction CPA Wesley Middleton in his post at Punchlist.
Contractors frequently look at WIPs as a burden – a responsibility they don’t want, placed on their shoulders by underwriters – but WIPs are a highly effective construction management tool.
The WIP keeps you ahead of a contract by displaying your strong billing and management capabilities and enhancing your organization’s reputation and bonding capacity to open up new opportunities for growth.
Percentage of Completion Accounting
Understanding the percentage of completion method of accounting is the first step to understanding the WIP. If you only take the total billed to your client, subtract the costs associated with the contract, and assume that the resulting sum is your profit or loss, you’re headed for trouble. As CPA Middleton explains in his Punchlist article, CPAs use the percentage of completion accounting method to determine profitability.
Determine the percentage of completion by dividing the costs incurred to date by the total estimated cost. If you’ve incurred $60,000 in costs to date on an estimated total cost of $300,000 for a $500,000 contract, for example, your job is considered 20% complete in the WIP report.
If you’ve only billed for $60,000, however, the WIP report will show your status as “under-billed” by $40,000. Because percentage of completion accounting considers the total contract value, you should have billed $100,000 for the full 20% of the contract. This under billing can cause your underwriter to lose confidence and lead to lower bonding capacity. Conversely, overbilling (billings in excess of cost) for $125,000 would show that you’re able to stay ahead of the contract and avoid cash flow issues.
Staying up to date with frequent WIP reports can keep your billing optimized for the best financial impression.
WIP Reports and Your Organization’s Reputation
In his article at the Construction Financial Management Association, Determining Your Company’s Bonding Capacity, underwriter Jack Kehl points out that financial reports, including WIP reports, will be reviewed before an underwriter even meets with your company – so accurate, real-time information is a must. WIP reports are also used by the underwriter to assess your company’s estimating capability, and they show if you’re accurately tracking job cost to enhance future bidding.
WIP reports are an integral part of the construction business. Used properly, they help manage change orders and contract adjustments and track invoicing from vendors and subcontractors. They can make the strong financial presentation of your organization that bankers and surety companies are sure to notice, opening the door to bigger and better projects.