Value Of Work In Progress For Commercial Builders
For Commercial builders and subcontractors, borrowing money and receiving financial backing is more difficult now than ever
. Leniencies and inconsistencies that were previously overlooked are no longer allowed. Construction companies must maintain accurate figures and detailed financial reports or they may struggle to obtain the financial backing required to win and perform work.
What is WIP?
WIP stands for "Work In Progress." It may also be referred to as "job profitability," "work in process," the "bonding report," or "percent complete report."
WIP is used for a variety of reasons. First and foremost, CPAs, banks, and bonding companies use it to gauge the progress and profit of the ongoing jobs that a construction company is executing. Work in Progress may also be used to determine the amount of profit internally and provide information to establish the booked income for the month or quarter.
In a typical commercial environment, in order to be awarded any large contracts for building, the contractor must be able to obtain bonding. The bonding company assumes the financial burden for completion of jobs if the contractor cannot fulfill its obligations, so the bonding company needs to know the capacity of the applicant. While there are many ways of determining this, one way is to determine what jobs the contractor is already working on, where jobs are in completion, and how likely they are to be successful. One unusual job (too large, too complex, too long) can break a contractor and thus lose money for the bonding company. The same holds true for number of jobs in the same time frame.
Likewise, contractors will use lines of credit to finance projects so the banks also need to know the progress of jobs and their likelihood of succeeding. To access this information, the bonding company and/or bank will require a WIP report.
In addition, many contractors practice an accounting method known as work-in-progress and need the WIP report to assess income. In these cases, costs incurred on the job are originally recorded to the balance sheet and are moved to the income statement as significant portions of the job are completed. The WIP report is key to managing these activities.
Challenges Facing Commercial Builders when Producing a WIP Report
A very large percentage of contractors are stuck in the double-entry mode. Instead of using contractor software, they manage accounting using generic, off the shelf programs and spreadsheets, which not only requires multiple entry but then demands extra effort to produce necessary reports. The typical contractor spends hours, even days, or pays a CPA, to prepare a WIP report. There can also be problems with the timeliness and accuracy of the WIP report for various reasons.
The bonding company may want the report from the end of last quarter. These figures may have to be pulled from several different places - cost-to-date, estimated cost, billings, contracts, and still be date related. This is time consuming and fraught with the possibility of errors.
A Possible Solution
One possible solution to this challenge is for the commercial builder to invest in construction accounting software that allows a single entry point for relevant data, and is capable of producing the reports needed in a timely and accurate manner. The owner needs to understand that time spent researching and selecting the right software for the needs of the company's job cost accounting requirements can save time and money in the future. The solution chosen should pull all figures and calculate the profit and progress based on those figures. There should be no need for double data entry. Reports generated by this construction management software should be flexible enough to include or exclude appropriate data and be run for specific date ranges depending on the requirements of the report recipient.
In this economic environment, bonding companies and banks are less than forthcoming with bonding and lines of credit. The validity of manually created WIP reports can be questionable and it can be very difficult to provide the necessary backup to substantiate these spreadsheet-based reports. A contractor needs to be able to show that they have the capacity to be bonded and are financially responsible or they will not be awarded the jobs necessary for survival and growth.
by: Andrea Frassoni
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