Small business owners in the construction industry are often confused by exactly what the Work-In-Progress (WIP) schedule is for. If you’re not already familiar with its purpose, the benefits it offers, and the potential drawbacks of not paying close attention to it, it can be seem bewildering. However, a close look will illuminate its most important aspects.
A Vital Tool for Operational Efficiency
You may run a very efficient construction company, but if you can only demonstrate that fact after your projects are complete, you’ll leave your clients feeling very uncertain about your methods while construction is ongoing. As a result, during the course of construction, you may be called on to explain whether progress is going according to schedule, and whether you’ve overbilled or underbilled for the work done so far.
This is where the WIP schedule comes in. It gives you the tools needed to determine an accurate financial outlook at any point during the construction project cycle. This is of great importance to bankers, bond agents, surety underwriters, and auditors who are looking for guarantees on your ability to correctly estimate the cost of your work.
What Are Third Parties Looking For?
From the underwriter’s perspective, a few clear goals should be examined in a WIP schedule. Third party stakeholders in your project are looking for:
1. CONSISTENCY
Your profits should be relatively consistent throughout the project. Large swings in project profitability indicate that you’re not planning your project well and could indicate cash flow problems in the future. Both business owners and estimators are usually too optimistic about profits, leading to a situation called a profit fade – where profits at bid decrease as completion draws nearer.
2. POINTS OF COMPARISON
While you and your client may not have access to data about what is normal for the type of construction project you’re undergoing, the underwriters do. One of their analysis techniques is grouping together similar projects and looking for any large inconsistencies between them – any of which is a cause for concern.
3. YOUR ABILITY TO PLAN AHEAD
If you slightly overbill for project milestones, it indicates that you’re planning ahead. You won’t have cash flow issues when dealing with unexpected obstacles. On the other hand, underbilling can indicate cash flow problems or improper management.
Information You Can Glean from Your WIP Schedule
If you have a well-made and thoroughly complete WIP schedule, you can use it to identify sources of profit fade. You can also identify construction processes that are more expensive than they need to be, as well as other points of inefficiency throughout the project.
For this reason, financial experts in the construction field recommend updating your WIP schedule once a month at minimum. Having it closed and completed by the middle of the month is even better.