Whether you are looking to purchase a business, sell a business, or ensure your current business maintains its financial health, financial statements are key to making the right…
LUTZ BUSINESS INSIGHTS
wip schedule 101
will lanik, audit manager
All businesses need accurate financial data to help understand how it is performing and, more importantly, to assist in planning for the future. The construction industry is no different, and one of the most important inputs to financial data is the work in progress (WIP) schedule. Completing a monthly WIP schedule can greatly improve your Company’s ability to monitor job and financial performance.
The WIP schedule has four major inputs that need to be updated as jobs are acquired and completed.
1. Current Contract Price
- This should include the original contract amount plus or minus all expected and agreed upon change orders.
- Project managers and accounting need to be on the same page as change orders are issued.
2. Estimated Cost of Construction
- The estimated costs should continually get updated by the project manager and/or accounting department as change orders are issued, and the job progresses. It is not uncommon for estimated costs to remain unchanged throughout the job, which can impact revenue recognition.
3. Cost of Construction
- Total expenses incurred on the job under contract. This typically includes labor, subcontractors, materials, and applied overhead. Overhead can be the hardest to allocate and tracking it often dependent on the type of work your company performs. It is important to understand what drives your applied overhead and make sure its allocation is representative of your costs.
4. Progress Billings
- This involves the total amount billed to date on the job. It is important that the billing is occurring accurately and regularly within the job guidelines.
Once the four inputs above are updated, it is essential to evaluate and scrutinize your WIP schedule before using it to make decisions for the future.
1. Percent Complete
- Is the percent complete on each job representative on the actual work accomplished?
- Are jobs progressing along with owner expectations and completion timeline?
2. Margin Review
- Are your margins staying consistent or fluctuating from the bidding phased through job completion?
- Are you picking up additional margin (gain) or losing margin (fade) as your jobs advance?
- Look at the margin on your complete job schedule vs. WIP schedule.
- Is your margin large enough to cover the company’s fixed general and administrative expenses?
- Are you on pace to have enough top-line revenue to cover fixed costs?
- If you are not capturing applicable overhead costs, are your margins representative of actual job profitability, or is this getting accounted for in your internal estimates?
- Are you pricing/bidding jobs accurately?
3. Billing review
- It is hard to bill when invoices are not getting approved and remitted timely. Make sure you have a company policy on getting costs input in the correct month.
- Overbilled (billings in excess of costs and estimated earning) amounts show up on your balance sheet as a liability and can impact bonding, but they improve cash flow management.
- Underbilled (costs and estimated earnings in excess of billings) amounts show up as an asset on the balance sheet but can hinder cash flow management if not tightly monitored.
If the current WIP schedule represents the current jobs under contract and progress to date, proceed by adjusting your general ledger revenue, costs, and over/under billings to match the job schedule. It is important to do this at least monthly after internal review to avoid surprises at year-end. If you have any questions regarding the WIP schedule, contact us.
ABOUT THE AUTHOR
WILL LANIK + AUDIT MANAGER
Will Lanik is an Audit Manager at Lutz with over five years of experience in accounting. He is responsible for providing accounting, auditing, and consulting services to privately held companies in the construction, manufacturing, and employee benefit plan industries.
AREAS OF FOCUS
- Employee Benefit Plans
- Privately-Held Companies
- Construction Industry
- Manufacturing Industry
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- MBA, Creighton University, Omaha, NE
- BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE
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