Timeliness: Your Work in Progress (WIP) Schedule may be Incorrectly Forecasting your Cash Flow

A Work In Progress (WIP) report consists of an accounting schedule that’s a portion of a company’s entire balance sheet. In best practices, each accounting period has a calculated work in progress report that complies with GAAP principles.  These reports are required on projects where the Percentage of Completion (POC) accounting method is used. The WIP report typically consists of current period and project-to-date financial metrics that explain each contract the company is working on, however, the format does change from company to company.

The WIP schedule is used as a financial reporting tool to show whether or not you are “over-or-under-billed and cash positive or negative” for all projects and the company as a whole when the individual projects WIPs are taken together. A WIP report is supposed to be an early indicator or warning of projects going over budget if they are done in an accurate and timely manner.

Work In Progress for construction companies

A well-run construction company will have accurate, up-to-date WIP schedules for each of the projects that they have in-house, from the very beginning of a project when the contract is signed, until the very end when the last item on the punch list is done, the final invoice has been sent to the customer, and the final payment (which should hopefully include any withheld retainage) is received. The owners and managers rely on these WIP schedules to get an accurate measure of exactly where they stand financially concerning each project and taking each project’s WIP schedule together for the company as a whole.

Using Work In Progress (WIP) to forecast cash flow

Relying on traditional spreadsheets and tracking costs after the fact is a poor business practice known in professional project management circles as “management from the rearview mirror.” Making present and future cash flow decisions based on past project history is like closing the proverbial barn door after the horse has run away.

The WIP schedule tracks project data such as contract value, costs incurred to date, total estimated costs, and project billing. The WIP schedule is a strategic tool that offers a snapshot showing exactly where your profitability stands on a job-by-job basis. This data allows the company to get an overall view of all jobs in progress to make informed management decisions.

The WIP report also gives red flags in cases of under-billing and excessive percentages of incurred costs as a job progresses, providing time to investigate, adjust, and make changes. Running a weekly WIP report can keep a company “ahead of the contract,” increase profitability, and enhance a contractor’s business reputation to expand business opportunities in the future.

Using a WIP to improve your timeliness

Lastly, one of the best ways for construction companies to improve their businesses is to perform their accounting functions quickly while ensuring to record all costs and revenues in the proper accounting period. 

The WIP schedule can be a powerful tool to reveal inefficiencies in construction operations and better understand company performance and factors affecting profitability. 

Strategically-designed WIP schedules include both standard and various descriptive columns that highlight the important details of all contracts in process and better enable meaningful analysis.  

Conclusion

Work In Progress Schedules can be one of the most valuable tools that a business owner can use to control his/her business on a weekly/monthly basis. Understanding these items makes the Work In Progress Schedule a lot easier to create, read, and understand. 

TGG builds and maintains these items on a weekly and monthly basis for our clients. We can help you implement these tools into your business.