Is your profitability lagging? Does your surety seem a bit more hesitant than usual?
If so, there may be a number of things you need to do. But one of the most important is a reassessment of your work-in-progress (WIP) report.
As you know, your WIP report is intended to provide a real-time snapshot of how jobs underway are doing and what’s coming up on the horizon. Yet the breadth of detail and accuracy of data in this critical report can often suffer over time.
Look at the Right Things in your WIP
A WIP report should include all revenues and costs for each of your current, signed contracts, including those where work has not yet begun.
More specifically, for each contract, the report should reflect the total contract amount (including signed change orders) and the estimated gross profit (reflecting signed change orders).
Some WIP reports even show the original total estimated cost on a project and direct and indirect costs as well as the revised cost estimates. Additional items for each project may include:
- Current year totals for revenues earned, cost of revenues, gross profit and percentage complete on each job, as well as job-to-date information for each of these
- Estimated costs to complete
- Billings to date
- Underbillings (costs and estimated earnings in excess of billings)
- Overbillings (billings in excess of costs and estimated earnings)
Some WIP reports also have a backlog column to represent billings left on each contract, taking into account the over and under billings currently on the respective contracts.
Is your WIP Mapping your Current Location?
Check into the comprehensiveness of your latest WIP report. It should enable you to readily compare the total estimated cost of each contract with the actual project cost to date in as much detail as is useful.
You want early and frequent warnings of any profit fade on a job as it starts to occur, giving you a chance to get that project back on track.
You can also use WIP reports to discover patterns that need correcting. If you regularly estimate a 15 percent gross profit, but your actual profit is typically 10 percent, you may need to revisit your estimating strategies.
Re-tooling your estimating process can include evaluating the company’s indirect job cost rates, equipment rates and how long it takes your employees to perform certain tasks.
These rates should be evaluated on a regular basis, typically annually, to capture important fluctuations in expenses. In addition, an accurate WIP report can provide feedback opportunities for your project managers.
Finally, surety underwriters look at WIP reports when considering how much bonding to offer a construction company. If your balance sheet lacks the luster sureties like to see, a profitable backlog may give a surety what he or she needs to underwrite your project.
Make the Commitment to your WIP
For the most accurate picture of the financial status of each job, update your WIP report weekly if possible but at least monthly. Frequent updating often does mean more work, but it’s a commitment worth making.
No other report can provide the same useful, instant feedback on a company’s contracts as the WIP.
McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.