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Cool WIP: Revamping your Construction Work In Progress

The construction industry is competitive, and when there is competition, there is margin pressure. Project managers, estimators and owners are currently faced with increased risk due to uncertainties associated with the supply chain, unusual weather patterns, quality labor shortages, political landscape, and, yes, inflation.

The cost of material is on the rise from supply chain disruptions due to COVID-19 shutdowns. Lenders and investors faced anxiety and became less inclined to finance construction projects. Such situations drive the bidding volume down, increase competition, and often result in low margins. This felt like uncharted territory for some as the construction industry has seen some consistent growth over the last decade, along with a recent high level of funding from the SBA PPP Loan Forgiveness Program. However, the industry has seen its fair share of shortfalls and challenging times and has always come back strong. Looking forward, building momentum continues to increase the size of the light at the end of the tunnel. Throughout the ups and downs, one area where contractors need to maintain their efforts and consistency is in its financial and accounting considerations for long-term contracts. The industry is putting the pandemic in the rearview mirror, which means that now, more than ever, is the perfect time to revamp internal controls and best practices over financial and operational matters.

How can WIP change your company for the better?

A work in progress schedule (WIP) and related data gathering and collaboration are among the most valuable processes and procedures a contractor can use when managing their operations and increasing profit margins. It is an essential tool that tells the story of job progression, provides the company with more accurate margin analysis and improves cash flow efficiency. The monthly or quarterly WIP schedule requires more frequent communication between management, accounting and in-field project managers, which is typically where we see collaboration fall apart. All parties must be reminded that building the project and getting it done on time is only part of the process. Accountability, measurement, and risk assessment are just as important. A timely and constructive WIP process gives management a fundamental understanding of where the business is at any point during the year. This understanding will allow a company to navigate competition and inflation as well as supply and labor shortages. As job costs drive revenue for financial statement purposes, the WIP schedule will create good practice habits for billing for out-of-scope expenditures between the standard monthly billings, allowing the contractor to more timely negotiates for change orders on such costs.

Looking at a more frequently prepared WIP schedule allows companies to understand where a job stands in the moment. Suppose a company is only preparing a WIP schedule once or twice a year. In that case, it may not be known what impact a job will make on the company financial statement until the job nears completion, or in some cases when the independent review or audit report is prepared. Monthly WIPs will allow management to analyze jobs and evaluate whether it was adequately estimated. This will enable the company to improve estimation habits when bidding on the next job. A company with a more frequent WIP will be able to explain over-under billings better.

In the industry, a company is not the only party wanting consistency with job performance. Lenders and sureties with reporting requirements will dive into the over-under positions and excessive profit gain or fade before approving line of credit extensions or bonding larger jobs.

Lastly, if the WIP schedule is not accurately maintained, it can also become a liability to the company.

Calculation errors, poor estimation, and not including appropriate change orders can result in poor revenue recognition and not fully projecting future job losses, which will ultimately result in drastic inconsistencies in year-over-year reporting. It is essential to utilize quality construction accounting software and dashboard reporting abilities, so all modules are synced and showing the exact information required to analyze job performance. Paperless environments through digital transformation call for more efficient and up-to-date information exchange. Having a monthly WIP improves job and accounting production and allows management and business development teams to be more forward-thinking.

Remember, put the Cool into your WIP, and you will have a Bird’s Eye view.

Author: Joseph Boccia, CPA | jboccia@withum.com

Please contact a member of our Construction Services Team  to help address your questions.

Construction Services

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