Work in Process Schedule: The Lifeblood of a Construction Company
The work in process schedule (WIP) is the heartbeat of any construction company and needs to be accurately maintained and analyzed. The WIP is a financial performance summary of each individual contract that the company enters.
There are many items that affect the components of the WIP, such as contract price, estimated total costs, estimated cost to complete, estimated gross profit and costs to date. In determining the contract price, consideration needs to be given to change orders (both approved and unapproved), claims and contract options and additions. The ability to properly determine the estimated cost to complete will determine the financial success or lack thereof.
The construction industry is unique in that costs drive revenue. Your WIP can help you better understand your costs and revenue and help you keep a watchful eye on critical movements and flows, such as:
- Monitoring backlog sales and backlog gross profit
- Ensuring that overhead and equipment costs are properly allocated
- Using as a cash flow tool to help monitor and report out to nonfinancial stakeholders
Once jobs are completed, consider having post-project reviews on larger jobs with key project team members to determine what went right, what went wrong, etc. The final job cost schedule will be the foundation as to where to start the meeting. The WIP can also determine any under or over performance that occurred in categories such as material, labor, etc.
The WIP also can significantly impact the taxes that a contractor pays, especially in the year they are required to be reported as income. Terms such as home construction contracts, residential contracts, retainers, small contractor exemption, less than 10% complete, all need to be considered and analyzed to determine if different accounting methods should be elected to allow taxes to be deferred to future periods.
A properly managed and analyzed WIP is critical to the success of any construction company. We can help with instituting the methods, policies and procedures necessary to assist in becoming a best-in-class contractor. Please give us a call to discuss how we can help you improve your company’s profitability.
Dale A. Ruther?>
CPA, CIT, CDS, CCIFP
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