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 present 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:

Purpose of a 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. The contract amount should include any variable consideration anticipated to be received but should not include any taxes assessed by government 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 in 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’ll 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’s a good practice to update for these changes monthly.
• Gross Profit – This is the contract amount minus estimated costs.
• Gross Profit % – This is the gross profit divided by the contract amount multiplied by 100.
• % Complete – This number is the total costs to date divided by your estimated costs and multiplied by 100.
• Earned Revenue – This is the contract amount multiplied by the percentage complete number. This is the amount of revenue you’ve earned on each job based on your percent complete.
• Billed to Date – This is the amount 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 you’re 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 that time delay. Overbilled can also indicate the job is doing better than expected, or it may mean there are costs missing on a job. These are great things to analyze and make sure you understand why a job is overbilled.
• Backlog – This is the contract amount minus earned revenue, which is a helpful measurement and typically found on a WIP schedule. 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.

Preparation for a WIP Schedule

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. Springline 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.

TAGS: Construction, Accounting Services