A work-in-progress schedule, also termed a “WIP” or a “status of contracts” is a must have for any construction company that performs contract work that extends more than a few days. The WIP schedule is a tool utilized to track the progress and financial performance of a contractor’s “Unstarted Contracts” through “In-progress” through “Completed Contract” phase of a contract life cycle.
The WIP schedule should be prepared monthly for internal use as a top management tool to understand how the Company is performing on its individual contract level and company-wide for all contracts as well. Preparation of a monthly WIP is the only accurate way to know what the true profitability of the Company is.
Given today’s volatile construction market, a contractor needs to know monthly where the individual contracts and the Company’s profitability is so that they can make decisions as problems or trends are happening and not “react” once a year after the CPA comes in to close the year.
Reporting the Status of Contracts
Once properly designed, updated and utilized, this same WIP schedule is used for reporting the status of contracts to the Company’s surety and bankers. In today’s surety climate, a WIP is always required at a 6-month and annual period. Depending on the bonding program and the outstanding contract bonds, many sureties will also require a WIP schedule for the interim quarterly periods. In addition to surety companies placing a high reliance on a construction industry savvy CPA, they also place a high degree of reliance on this WIP Schedule and follow / track the numbers provided to them diligently.
Do not take providing the surety company with WIP numbers lightly! I have seen circumstances where the sureties monitor the WIP Schedule even closer than top management in the Company. The importance of the WIP schedule should take top priority each month in your Company. By having the right CPA in place along with accurate and timely financial reporting (including a WIP schedule) will also translate in the lowest possible bond rate. This translates into real dollars to the Company.
WIP Schedule for Internal Use
Generally, the WIP generated for internal use is more detailed than the WIP provided to the Bonding Company / Bank so in many cases, multiple WIP reports should be designed an used depending on whether the user is “internal” or “external”.
Many companies prepare an “offline” WIP schedule which is typically done in Excel. I would not recommend this and have seen too many instances where there are formula errors, costs that do not reconcile back to the basic financial statements and many other errors.
The only route you should consider with your Sage Construction Software is to have the system generate the WIP schedule. This, of course, does take some planning with your Sage Advisor and your CPA to make sure that you are capturing the correct information in the reports you generate.
4 Key Elements of the Schedule
A WIP schedule is generated based on 4 key amounts that need to be carefully derived from your Sage accounting system. You will need to methodically plan out some of the following amounts that will appear on the WIP Schedule for each individual contract:
Contract Value – Does the contract value include the original contract as adjusted for change orders? How do you want to adjust the contract value for unapproved change orders?
Costs Incurred to Date – Does the costs to date include all direct and indirect costs? Does the indirect costs include insurances, project management, and other indirect costs not charged directly to the contract? How is equipment and yard costs charged to job costs?
Total Estimated Cost – Does project management update the estimates timely on a monthly basis? How are the estimates to complete (or total estimated costs) being updated in the system?
Project Billings – This amount should be simply derived from the billings information in the system.
Once the above 4 amounts are determined to be accurate, the Sage construction system will do the rest for you. This includes calculating job to date, year to date and month to date:
- Revenues earned
- Costs incurred
- Profit (or loss)
- Backlog – revenues, costs and profit
Although the initial setup of the WIP schedule may seem to be a little work, the long term benefits and the hours you will save each month, quarter and year end is tremendous. Your Surety Company will be impressed with this automation, but more important than that, top management will have the right tools to manage the contracts and Company on a more timely basis.