CONSTRUCTION Accounting ARTICLE -
Whip Job Progress Problems with a WIP Schedule

Keeping track of job progress is vital to any contractor’s success. You need to understand how your schedule should function and what variables factor into calculating revenue recognition under the percentage-of-completion accounting method.

That’s why it’s best to track your projects with a work-in progress (WIP) schedule. Using the "Sample WIP schedule" in the sidebar, let’s take a look at how it works.

Estimate job profits

The WIP schedule’s first three columns (A to C) allow you to estimate job profitability in total. Begin with total expected contract price (column A), which you should base only on a signed contractual agreement.

Include change orders only if signed, unless you’re sure to collect them. Of course, sometimes change orders are signed after the fact, which can be risky. If you elect to move forward on one, add the anticipated additional costs from the change order to your total estimated job costs (column B).

Calculating total estimated job costs calls for a solid understanding of project specifications and should include both direct and indirect costs. Miscalculating these amounts may cost you money because actual expenses could exceed actual profits — resulting in lowered project earnings.

After completing a job, go back and review whether your estimated gross profit (column C) came to fruition. If it didn’t, investigate why and adjust your operations accordingly.

Determine actual progress

WIP columns D through F measure a project’s economic progress. Costs incurred to date (column D) include direct and indirect expenses. When closing out a period, be sure to estimate and accrue project expenses for which vendors may not have invoiced you, such as material or equipment rental costs. If you don’t include these expenses, you’ll underreport gross profit earned to date on the job.

Calculate the job completion percentage (column E) by dividing the costs incurred to date by the job’s total expected expense. In Job No. 1, 40% of the expected job costs have been incurred, thus 40%, or $40,000, of the contract revenue has been recognized (column F), producing a gross profit percentage of 30%.

Examine your balance sheet

To maximize cash flow, your billings to date (column G) should either equal or exceed the revenues recognized. On Job No. 1, the billings to date are less than the revenues earned to date, which at times cannot be prevented because of contract provisions.

Thus, the $15,000 difference between revenues recognized — $40,000 — and the billings to date — $25,000 — is reported as an asset called "earnings in excess of billings" (column H). 

Job No. 2, however, portrays a much more favorable cash flow position. It shows a scenario in which a job is billed in excess of earned revenues (column I). Doing so creates a balance sheet liability, because a $20,000 asset has been recorded for which no revenue has yet been recognized. 

Although you may think bankers and bonding agents would look unfavorably on this liability position, when used appropriately, it actually shows that you are managing your cash flow effectively.

Stay on track

If interpreted correctly, a WIP schedule can be an invaluable tool. Monitoring it closely and keeping it up-to-date will facilitate accurate revenue recognition and help you determine whether a job is progressing profitably.

Sample WIP Schedule

Job profitability estimation     Actual job profitability    Balance sheet reporting

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