What is a WIP report and why does my construction company need one?
A Work-in-Progress report is a schedule of every active job showing four numbers that matter. The contract amount, total estimated cost, costs incurred to date, and revenue billed to date. From those numbers you calculate percentage complete, earned revenue, and whether each job is overbilled or underbilled.
Percentage complete is usually figured using the cost-to-cost method. Actual costs to date divided by total estimated costs. If you’ve spent $300,000 on a job with $1,000,000 in estimated costs, you’re 30% complete. Earned revenue is that percentage multiplied by the contract amount. If the contract is $1,300,000 and you’re 30% complete, you’ve earned $390,000.
Then you compare earned revenue to what you’ve actually billed. If you’ve billed $450,000 but only earned $390,000, you’re overbilled by $60,000. If you’ve billed $350,000 on the same job, you’re underbilled by $40,000. Both scenarios tell you something important.
Overbilled jobs mean you’ve collected money for work not yet performed. That’s cash you have now but owe in performance later. Spend it on other things and you’ll have a cash crunch when the remaining work needs to get done. Underbilled jobs mean you’re financing the project with your own money. Work has been completed but not yet invoiced, which ties up cash and strains working capital.
Bonding companies require WIP reports. If you want surety bonds for public work or larger private projects, the bonding agent will ask for a current WIP schedule along with your financial statements. They’re evaluating whether you can complete the backlog without running out of cash. No WIP, no bond.
Banks require them too. Construction lines of credit and project financing typically come with ongoing WIP reporting requirements. Your lender wants to see the same picture the bonding company does. Whether your billing is keeping pace with the work.
For internal use, the WIP report catches problems while you can still do something about them. A job trending over budget shows up as costs exceeding the estimated percentage. Billing falling behind shows up as an underbilled position. Catching this at 40% complete gives you time to adjust. Finding out at closeout means the money is already gone.
The WIP also drives proper percentage-of-completion accounting on your financial statements. Without it, your P&L shows whatever happened to get billed and paid in a given month, which has nothing to do with actual profitability by job. Clean construction job costing is what makes a WIP report possible in the first place. You can’t produce an accurate schedule if costs aren’t being coded to the right jobs as they hit your books.
Most contractors who come to Pasadena bookkeepers asking for help with bonding or bank reporting actually need the underlying job cost structure fixed first. Once that’s in place, the WIP report falls out of the system every month without a scramble.
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