WIP Schedule 101

WIP Schedule 101

 

LUTZ BUSINESS INSIGHTS

 

WIP Schedule 101

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

402.827.2080

wlanik@lutz.us

LINKEDIN

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
  • Audit
  • Assurance
  • Consulting
  • 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
EDUCATIONAL BACKGROUND
  • MBA, Creighton University, Omaha, NE
  • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Construction Month-End Close Checklist

Construction Month-End Close Checklist

 

LUTZ BUSINESS INSIGHTS

 

Construction Month-End Close Checklist

construction month-end close checklist

nate hagge, audit manager

 

Many say humans are “creatures of habit” and prefer routines, especially accountants. Those habits and routines may exist in our personal lives, professional lives, or both. As a business owner, establishing sound habits and routines around your company’s financial reporting process is key to monitoring its performance throughout the year. The ability to produce reliable financial statements also provides assurance to third parties, such as your bonding company or bank, to assist you with your business needs. Below you will find suggested procedures from an auditor’s perspective that can be incorporated into your monthly close processes (habits/routines), primarily focusing on your company’s balance sheet.

 

1. CASH/BANK ACCOUNTS

  • Verify that the bank balance on the bank reconciliation agrees with the respective bank statement balance.
  • Verify that the cash recorded on the trial balance agrees to the bank reconciliation’s ending cash balance.
  • Review outstanding checks older than six months and determine those that need to be voided.
  • Review for any unusual reconciling items identified and address them promptly.

2. Accounts Receivable

  • Verify the accounts receivable aging total agrees with the balance recorded on the trial balance.
  • Identify significant account balances past due and follow-up with the customer or document the collection status.
  • Review retainage terms (if applicable).
  • Discuss with management and determine if any past due balances need to be reserved against or written off as bad debt.

3. Other Current Assets (Prepaid Expenses/Other Receivables)

  • Review the balances and verify the appropriateness and existence of the asset on the balance sheet.
  • Maintain a schedule to track balances and verify it is updated for all recent activity. Verify the schedule in total agrees with the balance recorded on the trial balance.
  • In the case of prepaid expenses, review the amortization calculation of your prepaid asset, and adjust to the related expense if necessary.

4. Fixed Assets

  • Identify fixed asset additions and disposals during the period and document the following:
    • Acquisition/disposal date
    • Asset description
    • Copy of invoice from the purchase of assets greater than the company’s established capitalization policy
    • Are proceeds received on sale/disposal or trade-in of asset applicable?
  • Record adjustment for depreciation/amortization expense.
  • Reconcile balance sheet accounts to depreciation schedules. Reconciliation should include verifying balances of asset categories, accumulated depreciation/amortization and depreciation/amortization expense agree to totals on depreciation schedules.
  • Review “Equipment” type expense accounts on the income statement to ensure any necessary expenses/purchases are capitalized if they exceed the company’s capitalization policy.

5. Accounts Payable

  • Verify the accounts payable aging total agrees with the balance recorded on the trial balance.
  • Review accounts payable aging for any unapplied balances.
  • Review vendor balances for any discount opportunities related to payment terms.

6. Accrued Payroll and Related Payroll Liabilities

  • Trace balance in the account to supporting payroll records for payroll accrual for the respective month.
  • Determine the correct amount of days in payroll accrual.
  • Trace to the payroll tax returns filed in the following month/quarter.

7. Other Accrued Expenses

  • Verify any balances in this account can be traced to a specific expense.
  • Review and consider what necessary liabilities are NOT recorded and determine if they should be recorded in the current period.

8. Notes Payable/Long-Term Debt

  • Reconcile note payable/long-term debt schedule, which reflects monthly payments of principal and interest as well as ending note balance.
  • Verify interest expense reconciles to the income statement.

9. Update Work in Progress (WIP) Schedule (See future article on how to further analyze your WIP schedule)

  • Update the WIP schedule for the following changes to contracts:
    • New contracts signed
    • Change orders signed
    • Monthly billings
    • Project costs and overhead costs in the current period charged to projects
  • Update the WIP schedule for the following changes to estimates:
    • Contract price
    • Revisions to costs estimates
    • Change orders
  • Review the summarized schedule of contract activity to determine if any additional adjustments to contracts or estimates need to be made.
  • Record adjustment for under/overbillings and tie out to the balance sheet.

10. Income Statement Analysis

  • Generate a year-to-date income statement for your current fiscal year and compare that to the year-to-date income statement from the prior fiscal year. Based on your knowledge of the company’s performance from year to year, investigate any fluctuations that appear unusual when comparing the two income statements. The findings may vary, you could find you were more efficient in one period over the other, or you could find you had one-time charges that were appropriate for one period and not the other. Whatever the case, this exercise may assist you in catching potential miscoding of transactions prior to year-end close.

The suggestions above may sound familiar, and some may be new. Either way, these suggestions are intended to assist you in the monthly financial reporting process with the end goal of having reliable financial statements on a monthly basis.

ABOUT THE AUTHOR

402.496.8800

nhagge@lutz.us

LINKEDIN

NATE HAGGE + AUDIT MANAGER

Nate Hagge is an Audit Shareholder at Lutz with over nine years of experience. He has significant experience in providing accounting, auditing and consulting services to privately-held companies.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Construction Financial Management Association, Affliate Member
  • Construction Industry CPAs/Consultants Association, Member
  • National Utility Contractors Association, Affiliate Member
  • Associated General Contractors, Affliate Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Lincoln, NE
  • MPA, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • Alpha Tau Omega - Gamma Theta Chapter, Alumni Board Member

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Direct vs. Indirect Costs in the Construction Industry

Direct vs. Indirect Costs in the Construction Industry

 

LUTZ BUSINESS INSIGHTS

 

direct vs. indirect costs in the construction industry

Ryan cook, audit & consulting shareholder
clarke beller, Audit manager

 

A new project manager at your construction company is consistently seeing margins deteriorate at the end of their construction projects. The key question when confronting this situation is to determine if project management and accounting know and understand their costs. Knowing your costs can improve the bidding process and help you determine problem projects and employees.

Direct costs

Construction costs that are specifically allocable to construction contracts are typically referred to as direct costs. Common direct costs are often made up of materials, direct labor and subcontractor costs. There is little ambiguity with these costs, and they are typically easy to apply or assign to a specific construction contract.

indirect costs

In contrast, construction costs that are not specifically allocable to construction contracts are typically referred to as indirect costs. The three most common types of indirect costs include:

  • Overhead – Job site costs, home office costs and general conditions
    • Project Managers, Superintendents and other Support Staff
    • Office Trailers, Equipment and Supplies
    • Insurance, Office Salaries and other Miscellaneous Costs
  • Equipment – Owned equipment and small tools
    • Depreciation
    • Repairs and Maintenance
    • Taxes and Insurance
  • Labor Burden
    • FICA Taxes
    • Workers Compensation
    • Federal and State Unemployment
    • Vacation and other Fringe Benefits

common methods to allocate indirect costs

Below are a few examples of popular methods used to allocate indirect costs.

Allocate indirect costs based on direct labor:

Allocate indirect costs based on direct labor

Allocate indirect costs based on material costs:

Allocate indirect costs based on material costs

Allocate indirect equipment costs based on equipment hours:

Allocate indirect equipment costs based on equipment hours

common pitfalls while allocating indirect costs

However, when allocating indirect costs, be aware of the common mistakes people often make. A few of these common pitfalls include:

  • Not considering indirect costs in your bidding process.
  • Not allocating indirect costs on a timely basis (i.e. annually instead of monthly).

Maintaining timely records and being sure to include all costs during the entire project will help you avoid any potential errors.

Keeping track of your construction project costs can be tricky and time consuming. Being able to understand the difference between the two different types of costs will not only help you improve your margins but will give you a better estimate of your project spend. If you have any questions, or would like more information on this topic, please contact us today.

ABOUT THE AUTHOR

Ryan Cook

402.827.2085

rcook@lutz.us

LINKEDIN

115 CANOPY STREET

SUITE 200

LINCOLN, NE 68508

RYAN COOK + AUDIT & CONSULTING SHAREHOLDER 

Ryan Cook is an Audit and Consulting Shareholder at Lutz with over 11 years of experience in accounting and assurance and five years in business valuation. He provides accounting, auditing, and consulting services to privately-held companies, with in-depth experience in the construction industry.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • The University of Nebraska at Lincoln School of Accountancy, Advisory Board
  • Boys and Girls Club of Lincoln, Board Member
  • Habitat for Humanity's Annual Fundraiser (Brew Haha), Past Committee Member

402.778.7964

cbeller@lutz.us

CLARKE BELLER + AUDIT MANAGER

Clarke Beller is an Audit Manager at Lutz with over four years of experience. He focuses on providing auditing and consulting services to privately-held companies as well as for employee benefit plans.

AFFILIATIONS AND CREDENTIALS
  • Nebraska Society of Certified Public Accountants, Member
  • American Institute of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Lincoln, NE
  • MBA, University of Nebraska, Omaha, NE

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Financial Statements in the Construction Industry

Financial Statements in the Construction Industry

 

LUTZ BUSINESS INSIGHTS

 

financial statements in the construction industry

This presentation, led by Ryan Cook and Shawn Wederquist, discusses the basics of Construction Financial Statements. You will gain an understanding of financial statements and what key financial indicators to watch for as it relates to banking and bonding.

 

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SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Paving the Way to Surety Bonds for Construction Projects

Paving the Way to Surety Bonds for Construction Projects

 

LUTZ BUSINESS INSIGHTS

 

Paving the Way to Surety Bonds for Construction Projects

JARED HARDY, AUDIT SHAREHOLDER

 

The Peterson Construction Company is about to embark on a significant real estate project in a revitalized community in a neighboring city. The last step the company needs to take before the official start of work is to secure a surety bond. While all signals look good, John Peterson is not altogether certain the financial underwriter will deem his company a safe risk.

Sound like a familiar scenario? After all, surety bonds are commonly needed by construction companies. Often confused with insurance, these bonds work more like a form a credit—a guarantee that the construction company will carry out a contract within all applicable laws and regulations. In other words, if a company does not fulfill its responsibilities according to the terms of the bond, a project developer can file a claim and recover all financial losses.

Sureties primarily provide three types of bonds in the construction industry that provide varying forms of protection:

Bid Bond

Protection provided to a project owner if a contractor backs out of a project after winning a bid or fails to secure a performance bid. This type of bid provides a guarantee that the project will be undertaken within the terms at which the contractor bid.

Performance Bond

Financial loss protection provided to a project owner in the event that a contractor does not complete the project in accordance with the terms agreed upon.

Payment Bond

Assurance that a contractor has the financial capability to compensate workers and suppliers for labor and material utilized in the project.

While most construction companies understand the necessity of being able to obtain bonding, the factors that are considered by underwriters in determining the associated risk, and therefore their willingness to bond, are often unclear. As the ability to secure bonding is dependent on risk, it is important to maximize the attractiveness of the company from an underwriter’s perspective.

The following three Cs of a company are evaluated by surety specialists when determining a contractor’s risk level:

Capacity

Does the contractor have the necessary technical skills, knowledge, equipment, experience and staffing to complete the project? This question is answered by reviewing work in process (WIP) reports as well as previous jobs completed by contractors. WIP schedules are examined for contract prices, billings to date, costs to date and estimated costs to complete in order to determine job cost stability and profitability. Completed jobs provide a historical trend of overall profitability.

Character

What type of reputation does the contractor have within the construction industry? Character is determined by evaluating a contractor’s history and relationships; reputation for taking unusual or unnecessary risks; integrity; commitment to obligations; and past and pending litigation against the company.

Capital

Is the company financially viable? As there is financial risk associated with construction projects, it is imperative that a company is able to demonstrate its ability to meet obligations, sustain adequate working capital and generate positive cash flows. The proof of a company’s financial stability is generally illustrated in a company’s reviewed or audited financial statements. Since financial statements play an important role in determining whether a surety bond will be issued, it is important for companies to work with reputable accounting firms that specialize in the accounting industry and understand an underwriter’s perspective.

By gaining a clearer understanding of how surety specialists use these three Cs to evaluate a construction company, you will be able to better understand how they will evaluate your company. Similar to assessing risks a company may face, analyzing your own company in this manner will allow you to make improvements and increase the likelihood of securing bonding.

ABOUT THE AUTHOR

Jared Hardy

308.385.1167

jhardy@lutz.us

3320 JAMES ROAD

SUITE 100

GRAND ISLAND, NE 68803

JARED HARDY + AUDIT SHAREHOLDER

Jared Hardy is an Audit Shareholder at Lutz with over 13 years of experience. He has significant experience in public accounting providing accounting, auditing and consulting services to privately-held companies in a variety of industries.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BS in Accounting, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • NOVA Treatment, Board Member
  • Knights of Columbus, Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Construction Contractors Can Benefit From Tax Reform Changes to Long-Term Contracts Exception

Construction Contractors Can Benefit From Tax Reform Changes to Long-Term Contracts Exception

 

LUTZ BUSINESS INSIGHTS

 

Construction Contractors Can Benefit From Tax Reform Changes to Long-Term Contracts Exception

The 2017 Tax Cuts and Jobs Act is the most comprehensive reform to the U.S. tax code in more than 30 years. As taxpayers sort out the changes, construction company contractors should take notice of a very positive change in the tax reform package—the increase in the gross receipts limit to qualify for the small construction contract exception to the percentage of completion method (PCM) by $15 million. The following provides information on what has changed and who can benefit.

 

Overview

While taxpayers must use either the cash or accrual accounting method for short-term contracts, they must account for long-term contracts using the rules under Code Sec. 460 (e). For long-term contracts, taxable income is generally determined using either the PCM or the completed-contract method. Under the PCM method, taxpayers must include in gross income for the tax year an amount equal to the product of the gross contract price, and the percentage of the contract completed during the year.

 

Old

Before the tax reform package was enacted, construction companies with average gross receipts of $10 million or less in the preceding three years were entitled to an exception from the requirement to use the PCM method for long-term contracts as long as they met certain requirements. They were allowed to instead deduct costs associated with construction when they were paid and to recognize income when the building was completed.

 

New

The Tax Cuts and Jobs Act increased the amount of gross receipts from $10 million or less to $25 million or less. For contracts entered into after Dec. 31, 2017, the exception for small construction contracts from the requirement to use the PCM is expanded to apply to contracts for the construction or improvement of real property if the contract: 1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract, and 2) is performed by a taxpayer that (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.

Use of this PCM exception for small construction contracts is applied on a cutoff basis for all similarly classified contracts. That means there is no adjustment under Code Sec. 481 (a) for contracts entered into before Jan. 1, 2018.

 

Effect of AMT Rule Changes

Alternative minimum tax (AMT) still requires the use of PCM on all long-term contracts, so there will still be an AMT adjustment required for any contract accounted for using the completed contract method. However, the AMT thresholds have increased significantly under the Tax Cuts and Jobs Act, causing fewer taxpayers to be subject to the AMT.

The exception under AMT for a married filing joint taxpayer increased from $78,750 to $109,400. The income threshold (AMTI) also increased from $150,000 for a married filing joint taxpayer to $1 million. For a single taxpayer, the exception increased from $50,600 to $70,300. The income threshold for single taxpayers was $112,500 and has increased to $500,000.

Please contact us or your tax advisor for more information.

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We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850