Article | by Gram Leahy

For construction contractors, maintaining an accurate and up-to-date Work in Progress (“WIP”) schedule is an integral part of project management. It provides a snapshot of the financial health of ongoing jobs, tracking costs, revenues, and profitability. However, keeping an effective WIP schedule requires diligence and accountability. Here are some best practices to ensure your WIP schedule effectively can drive profitability in your construction business:

-Regular Updates: One of the most crucial practices in maintaining a WIP schedule is updating it regularly. Ideally, this should be done monthly to keep up with the pace of construction work. Regular updates for progress billings and costs allow for real-time tracking of job progress, enabling more informed decision-making and proactive identification of potential issues before they escalate.

Once updated, the monthly WIP schedule should be actively analyzed and discussed amongst the project managers and the accounting and finance department. With transparency and accountability, these meetings can provide valuable insights into project progress and costs, ensuring the WIP schedule accurately represents the current state of each project. Regular meetings with these key stakeholders can lead to timely adjustments in the schedule, reflecting changes in estimated costs, revenue recognition, and billings.

-Allocate Your Indirect Costs: General Conditions (“burden” or “overhead”) refer to the necessary indirect costs and services needed to execute a project smoothly. Examples of indirect costs include equipment depreciation or rental expenses, temporary utilities or facilities, or administrative costs. These costs can form a significant part of the project’s budget. They must be both accurately estimated to avoid going over the budget, as well as allocated to capture a job’s true margin.

It’s crucial to reconcile these costs in the Work In Progress (WIP) schedule with the P&L and evaluate your over/under applied burden. To maintain credibility with surety underwriters, bonding agents, bankers, and your management team, your WIP schedule must include realistic burden rates. For example, an excavation contractor’s job schedule may indicate gross margins of 30%, however, if overhead costs include the depreciation of equipment and other overhead items at a level of 25%, a surety will likely question the reliability of job margins on the job schedule.

-Know Your Expected Margins: Gross profit percentage can vary from one job to the next due to a variety of factors. Reviewing for and understanding these variations can aid in recognizing scope changes, preventing losses through the negotiation of change orders in contracts. Profit margins on jobs of similar scopes should be in the same range whether they are in progress or a closed, completed job.

Input reliability is key, as inaccurate data can lead to misguided conclusions. Major discrepancies might indicate missing data inputs or poor estimates within the WIP schedule. Failing to account for all change orders or inaccurately estimating costs can distort the profitability perception of a job. Profit fade can negatively affect how a surety views your accounts as well as impact the amounts and timing of income tax payments to the IRS. Profit spikes may indicate overly conservative estimates.

-Managing Your Billings: Underbillings may be expected in the early stages of a project or due to timing issues, but they become a concern as they progress and can strain cash flow. They may also be a sign of undetected profit erosion or unapproved change orders. While overbillings are considered a liability on the balance sheet, they contribute to healthier cash flow and can prevent reliance on credit lines. However, overbillings may result in “job borrowing”, where more is billed than the costs incurred to date, suggesting that funds from one job are being used to finance another. If a contractor’s cash balance falls below this “job borrow” due to overhead financing and other projects, the surety may question their bonding capacity.

A well-maintained WIP schedule is crucial for construction contractors, providing a comprehensive overview of job progress, profitability, and financial health. It enables strategic decision-making, helps identify trends affecting profitability, and ensures the accuracy of financial statements. By regularly updating the WIP schedule and involving key project stakeholders along the way, construction companies can gain valuable insights into their operations and financial performance, ultimately leading to improved business outcomes.

To learn more, please reach out to Gram Leahy at gleahy@gmco.com.