Do you have projects that span multiple months or multiple years?
Does your gross profit percentage fluctuate from month to month?
A work in process (WIP) schedule is a great tool to track and measure the performance of each job on an ongoing basis. A WIP schedule is also key for matching costs with revenue earned and smoothing out your reported gross profits. The matching of costs with revenue earned will help alleviate major swings month over month and therefore presents a more accurate monthly financial for management and third-party use. A WIP schedule (Percentage of Complete Schedule) is required if you are presenting GAAP financials to a bank.
WIP schedules can be complicated and at times confusing, especially for new users, but once you start accurately reporting revenue and profits month over month you won’t want to turn back!
Below is a sample WIP schedule:
Overall, the purpose of the WIP schedule is to calculate the percent complete for each job (based on costs incurred to date) and recognize the revenue based on this percentage to depict the transfer of control over time. If there hasn’t been enough revenue billed, an underbilling adjustment will be posted which will increase revenue and create an asset on the balance sheet. If too much revenue has been billed, an overbilling adjustment will be posted which will decrease revenue and create a liability on the balance sheet.
Understanding the WIP Schedule
Let’s start by understanding each column of the WIP schedule. (Blue text is information that is input. Black text is a calculation.)
Contract Amount – This is the consideration expected to be received related to the contract (simply stated—the contract amount). The contract amount should include any variable consideration anticipated to be received but should not include any taxes assessed by governmental authorities.
If you have Time & Material Jobs the contract amount can be a little trickier. A good way to calculate is to back into the number by showing the gross profit you typically make on your T&M jobs. For example, if you have $7,500 of costs and generally have 25% gross profit, enter a contract amount of $10,000.
Estimated Costs – These are the costs you estimate it will take to complete the job and should include all direct and indirect anticipate costs.
You will want to review the estimated costs monthly to determine if your original estimate is still accurate. If there are job delays, material increases, or other factors that change your estimated costs, it is a good practice to update for these changes monthly.
Gross Profit = contract amount - estimated costs
Gross Profit % = gross profit/contract amount *100
% Complete = costs to date/estimated costs *100
Earned Revenue = contract amount * % complete
This is the amount of revenue you have earned on each job based on your percent complete.
Billed to Date – This is the amount you have billed as of the reporting date (month end, year end, etc.)
Underbilled – A job is underbilled if the amount of earned revenue on the job exceeds the amount billed to date.
This can be a great indicator if you aren’t billing enough on a job or if you missed billing a job each month. It can also be a flag if you are losing money on a job. Being underbilled will increase your revenue for financial purposes, but it means that you are paying for job costs with your cash rather than billing the customer and using their cash.
Overbilled = A job is overbilled if the amount of billed to date exceeds earned revenue.
Most companies love to be in an overbilled situation as this greatly helps cash flow. Sometimes general contractors take 60 days from the time of the invoice to pay, so being overbilled can help with the time delay. Overbilled can also indicate that the job is doing better than expected or it may mean that there are costs missing on a job. These are great things to analyze and make sure you understand why a job is overbilled.
Backlog = contract amount - earned revenue (this is typically on a WIP schedule and is a helpful measurement)
This is the amount of revenue you still have left to earn. Having a steady backlog can ensure that you are not only completing work, but that you are also out getting new work.
WIP schedules can be a challenge to prepare, but an accurate WIP schedule is a great tool for construction companies to help analyze and understand job performance, as well as assist in producing more accurate financials for third party and management use. Third party users of financial statements often call for financial statements to follow generally accepted accounting principles (GAAP). GAAP compliant financial statements require revenue to be recognized as services are transferred to the customer—which does not always reconcile with the timing of billings. A WIP Schedule corrects the timing of the billings to show the revenue that should be earned. MarksNelson has many years of experience assisting clients prepare WIP schedules and evaluating the results to ensure complete and accurate reporting. Please reach out if we can help and we’ll connect you with one of our experts in construction for additional information.