The WIP Report – What it Is, How To Use it, and Why it Matters
The WIP Report
What it Is, How To Use it, and Why it Matters
By Wesley Middleton
A Work in Process schedule, or a WIP schedule, is a vital document to bankers, bonding agents, and surety underwriters. This is the yardstick they use to measure your success or failure as a contractor. Not only do they look to it as an important metric of your success, but they also would like you to understand what it is and why they use it.
Despite its importance, the WIP schedule can be one of the most confusing schedules to understand. Read on to learn a CPA’s take on what the WIP schedule is, how to understand it, and why it’s important.
The Basic Premise of the WIP Schedule
Although you may look at how much you have billed your client, subtract the costs associated with that contract and think that is your profit or loss, surprisingly, it is not! CPAs determine your profitability with the WIP schedule utilizing the Percentage of Completion Method (PCM) of accounting.
PCM: by the Numbers
So how does the PCM work? We’ll first look at your estimated costs. This affects the entire process, so it is important that this estimate be as accurate as possible. Next, look at the costs you have incurred to date on the contract. If you divide the costs incurred by the estimated costs, this will give you the percentage of the estimated costs that you have incurred.
For example, let’s assume you have a contract for $500,000 and you estimate that your costs to do this job are $300,000. During the year, your bonding agent calls and wants to know how much of the contract is complete. You take a look at your costs incurred on the contract to date, and you see that you have incurred $60,000. With this method, the job is 20% complete ($60,000/$300,000).
We’ve determined how much of the contract you have completed. Now we apply that percentage to the contract price. (Note that this next statement is not the absolute, correct accounting answer, but in the eyes of the surety, this amount is how much you SHOULD have billed on the contract.) Using our example above, 20% x $500,000 is $100,000. So if you have incurred 20% of the costs, you should have billed 20% of the contract, or $100,000. This is exactly how the underwriter reads the WIP schedule. In reality, this is not the case: you have usually billed more or less than you should have.
That is where we get these two new confusing terms: over-billings and under-billings. You may see these written as “Billings in Excess of Costs” (over-billings) and “Costs in Excess of Billings” (under-billings).
What It Means: The Implications of Your WIP Schedule
Continuing our example, let’s assume you have only billed $50,000 of the contract. On this WIP schedule, you will be under-billed by $50,000. You “should” have billed $100,000 but you only billed $50,000. What does that say to your surety? This leads them to believe you may have weak project-management controls, and it points to potential future cash flow problems.
Even worse, a consistent under-billed situation leads them to question your ability to estimate your jobs. As the underwriter loses confidence in your WIP schedule, the bonding capacity gets tighter. As you can see, the WIP schedule is crucial to your credibility.
In our example, if you had actually billed $125,000 on the contract, this would mean that you billed more than you “should” have. You are over-billed. Bonding agents love this! It demonstrates that you have anticipated the future needs of the contract, and, assuming your client pays you on time, you have a much better chance of completing the job without a cash flow problem. It shows that you understand what it means to be ahead of the contract.
What Can You Do To Understand and Have a Better WIP Schedule?
1. Adjust your contract price and cost estimate for change orders.
2. Make sure all of your invoices from vendors and subs are recorded in the proper month. If the invoice was for work in January, make sure that it is recorded in January.
3. When you prepare your invoice to your client in February for the January work, make sure you date it and record it in January. Even though you may not actually prepare it until February 5th, record it on January 31st so that it is in the proper period.
4. Let your CPA review it before you send it to the underwriter.
Not sure if you’re on the right track? Try sending your WIP schedule to a CPA (link: http://www.middletonraines.com/) before passing it on to the bonding agent.
Don’t have a good WIP template? You can download a free template from MiddletonRaines+Zapata here (link: http://www.middletonraines.com/wip-schedule-template-download)
“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.” email@example.com
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