The best way to gauge the financial health of your construction company is by examining its financial statements. However, if you’re only examining the statements addressing projects after they are complete, you are missing out on a wealth of useful information that is only available mid-project.
Furthermore, your bond agent could ask you for this information at any time. If you provide a Work-In-Progress (WIP) report without having planned for it in advance, you run the risk of showing a less-than-desirable picture of your ability to bill for and carry out construction projects. This can lead to your bond agent losing confidence in your ability to carry out orders to plan.
Beyond that, however, the WIP schedule offers you the ability to carefully examine your project as it is occurring, pointing out areas of inefficiency and determining where you should focus your resources.
What Information Is Included in a WIP?
The WIP, far from being a burden placed on your shoulders by untrusting lenders, is a tool that helps you determine your strengths and weaknesses at all points in the project lifecycle. It includes the following performance indicators.
- Contract price
- Any change orders so far implemented
- Estimated job costs
- Estimated gross profits
- Costs incurred so far
- Revenues realized so far
- Completion percentage
- Billings effectuated so far
- Billings effectuated in excess of earnings, or
- Earnings received in excess of billings
These last two elements are of particular importance to underwriters. They are looking for an indicator of your ability to plan ahead and bill your client according to projected project needs.
Interpreting the Data
If a third-party underwriter sees that you are consistently billing for less than the cost of the actual work so far performed, it could point to cash flow trouble. It might appear like you are managing your project poorly. This could also indicate that you’re simply slow to bill for steps taken in the process – either one of these could eventually lead to cash flow issues later on.
If you take the time to analyze your WIP schedule yourself – or have a professional CPA do it for you – you can adjust to these realities as you uncover them. This gives you a much better chance of inspiring the trust and confidence of your bond agent even if you have issues with your WIP report data.
For instance, you could discover that you are underbilling because a large number of legitimate change orders have yet to be approved. The project may have front-loaded costs that need to be recovered throughout the course of the project. These may be obvious to you – but won’t necessarily be to your underwriter. Take control of your WIP schedule report to accurately view the road ahead of you.