Dan Swanson

CPA | Manager

Whether you are a general contractor or a subcontractor, reviewing, updating, and maintaining your work in progress (WIP) schedule is a never-ending process. With multiple active projects, keeping it up-to-date can feel overwhelming. You may have even asked yourself why do we go through this process every month? Is there a more efficient way to review our WIP schedule? What should I be looking for? How can I spot early signs of job performance issues? The key to answering these questions lies in understanding the key components of the WIP schedule and how it drives revenue recognition.

Step 1: Review the Contract Amount

Your estimating and bidding department put together a winning bid and the contract was awarded and signed. The job is entered into your accounting system based upon the awarded contract amount and the estimator’s cost budget information. The job is now underway, materials are ordered, and labor is on-site. Come month end close, what are some issues, we as accountants, should be reviewing? 

• Ensure the contract amount reflects any change orders.
• Flag unapproved change orders that may be improperly reflected in the contract amount.
• Discuss updates with project managers monthly to ensure accuracy.

Clear communication ensures the contract value aligns with reality.

Step 2: Update Cost Budgets

As the job continues to progress and change orders are issued what is happening to the original cost budgets? Do your change orders also include budget information and are these used to update the overall cost budget on the contract?  Unfortunately, it’s common to see the revenue from change orders entered, but cost updates are forgotten. This can lead to critical issues such as:

• Overstated percent complete, leading to inaccurate financial reporting through inflated revenues and profits
• Jobs showing percentage completion over 100%, resulting in:
  • Loss of credibility and trust as users of the WIP schedule may question the accuracy of the entire schedule
  • User questioning if there are cost overruns and job profitability is fading

A best practice is to ensure change orders include both revenue and cost adjustments which are used to update the contract and cost budget amounts. Clear and consistent communication between the accounting team and project managers is critical to accurately capturing and reporting this activity on the WIP schedule.

Step 3: Monitor Job Cost

In a traditional work in progress schedule costs drive revenue. For example:

• If total costs represent 10% of the budget…
• Then we recognize 10% of the contract amount as revenue and in turn recognize 10% of the job’s profitability.

As more costs are incurred, the higher the percent completion will be, and the more revenue and profits a contractor will recognize. This is why accurate job costing is critical in the financial reporting process. 

Some best practices to ensure accurate job costing include:    

• Reviewing individual job performance.
• Allowing project managers to have the ability to view job costs coded to their jobs in real time.
• Training staff on cost coding and utilization of approval processes to ensure cost are coded to the appropriate job.

Step 4: Track Billing and Cash Flow

The final step in reviewing the work in progress schedule is the Company’s ability to progress bill for the work performed. If you’ve incurred significant costs on the job but haven’t billed:

• What is causing the delays in the billings?
• Are project managers communicating with project owners to resolve?
• Are you at risk of not getting paid for all the work and costs incurred on this job?

Underbillings raise these types of red flags with both internal accounting teams and external financial statement users. Careful monthly review of the WIP schedule and monthly check-ins with project managers are key to keeping underbillings in check and improving cash flow.

Final Thoughts

There are many moving parts when it comes to your Work in Progress schedule. To manage them effectively:

• Review the WIP schedule carefully and consistently,
• Maintain open communication between the accounting department and the project managers.  

The more often these discussions occur the fewer surprises you’ll face at month-end, quarter end, and year end.

If your team could use guidance with your work in progress schedule, contact the trusted experts at Cray Kaiser at 630.953.4900 or complete this form. Our team understands the unique challenges contractors face and can help you with your WIP review process and improve financial reporting.