Stay on Top of Your Numbers with Over Under Construction Billing & WIP
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Construction-in-progress, or work-in-progress reports, help you track your income and expenditure throughout the project to understand whether you’re under or over-billing. Construction contractors should consider these factors as well as other unique factors from job-to-job when developing cost estimates. More accurate job cost estimates not only result in more precise revenue recognized over the life of a contract but also more seamless execution of the contract. If, for example, a WIP report shows that a project is 30% complete but has used up 70% of its budget, you can likely predict it’ll go over budget. As such, this encourages a more proactive than reactive approach to project management allowing companies to take action before it is too late.
How do I create a WIP?
- Use accurate, real-time data. The key to accurate WIP reporting is accurate, timely data.
- Track work completed instead of hours or labor costs. Another critical part of the WIP process is understanding the amount of work that has been completed on a project.
The construction work in progress account is a prime target of auditors, since costs may be stored here longer than they should be, thereby avoiding depreciation until a later period. Cutoff of job costs is another crucial factor of having an accurate WIP schedule at a specific point in time. Costs recorded in the wrong period will have offsetting effects, making the earnings in both periods inaccurate. Contractors construction bookkeeping no longer have to gather relevant information on costs for labor, equipment, materials, etc., for each job and hope their calculations are correct. Hiring an outside party to do the calculations may be expensive and inconvenient, especially when last minute changes need to be made if the third party is not available 24/7. Matt is a Louisiana native who’s settled in New Orleans after a brief stop in Baton Rouge.
What should you include in a WIP report?
To calculate the earned revenue to date, Construction Ltd then needs to multiply the percentage complete (25%) by the total estimated profit ($400,000). This means the business should have an earned revenue to date of $100,000. In addition, WIP reporting enables you to create accurate financial statements, outlining exactly what was spent on individual projects and where. This can then be used to inform wider decision-making, especially concerning the business’s overall financial health and growing bottom-line profits.
To calculate over and under billings for each month, we simply subtract the Earned Revenue from Total Billings. As you can see in the graph above, across 3 months, there were only two billings, the first in Month 1 for $20,000 and the second in Month 3 for $45,000. So even though cost continued to accrue in Month 2, Total Billings to Date remained flat at $20,000. It wasn’t until midway through Month 3 that Total Billings to Date increased by $40,000 to $65,000. Finally, we can define theOver/Under Billingsby taking the Total Billings to Date and subtracting the Earned Revenue to Date as defined above.
D. Costs to Date
Not knowing where we stand on costs during progress creates cash flow problems that research shows often prove fatal. In a unit price arrangement, the contractor is paid an agreed-upon price per unit of work completed. Unit price arrangements are often used when the project’s total scope isn’t fully known or if there are certain costs involved with the work that will likely be encountered but can’t be accurately estimated. To determine the total transaction price of a unit price contract, the contractor must have an accurate estimate of the total units that must be completed to fulfill the contract. Third party users of financial statements often call for financial statements to follow generally accepted accounting principles . 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.
How does WIP accounting work?
In accounting, a work in progress (WIP) account is an inventory account that includes goods that are in the process of being produced but are not yet finished. This account represents the costs of resources used but not yet turned into completed products. Also refer to the work in progress account as work in process.
This is where the right team, both internal and external, along with the right ERP software come into play. That is why it is very important that you understand your indirect overhead and have the means to control that figure. Your WIP is more than just a report that helps you review job status with your project managers and find out if you are happy or sad about how your jobs are doing.
F. Profit to Date
In essence, the goal is to compare the total expenses so far with the total projected expenses of the project, to work out whether or not you are under or over-billed. The most likely explanation is that the work hasn’t been completed yet, meaning you could be in for a shockingly high bill later when all those extra costs get spent. We’ll deep-dive into all there is to know about WIP reporting and how you can set your projects and electrical business up for success. And that is a real problem for both professional builders and the cowboys out there. For the cowboys, they don’t understand where this cash has come from.
Also, most construction companies are working on more than one project at a time , so each project has to be managed independently…even though the money all flows into and out of the same company’s bank account. The average certified public accountant will charge its client $150 per hour to prepare the WIP schedule. Determine the type of WIP that needs to be recorded on the financial statement. “work in progress” refers to anything partially completed in the manufacturing industry.
