The monthly work-in-progress (WIP) schedule your team puts together can be so much more than your financial statements. It can help you manage and plan throughout the entire year to better manage your jobs, maximize your profits, and assist with tax planning.
Make Sure Your WIP is Accurate
To start, make sure your WIP schedules are accurate. Your WIP is how you’re able to balance the billing of a project and its level of completion. Staying up-to-date with your billing on a project is crucial. Unique to the construction industry are two balance sheet items: Costs in Excess of Billings (underbillings), and Billings in Excess of Costs (overbillings). These two items come directly from your WIP schedule and will be reflected on your balance sheet as well. They reflect the variance between the amount of billings on a job and the revenue actually recognized in accordance with the percentage of completion method. The difference between the Costs in Excess of Billings and Billings in Excess of Costs is the net WIP adjustment and is reflected on your profit & loss statement.
For example, if a project is 60% complete, but only 30% billed, this imbalance is going to show an inaccurate level of revenue on your financial statements. Depending on the time of year, you may end up paying taxes on revenue that doesn’t exist because of this variance, as you are “underbilled” on this project. Alternatively, if you have 60% of a project billed and only 30% completed, this may cause unnecessary confusion down the road. It is thus important to know why you are over or underbilled on a particular job.
A Good WIP Takes Cooperation
Developing and maintaining a WIP requires a cooperative effort between your team and the team at Corrigan Krause.
We recommend monthly updates to your WIP. To stay nimble and catch any issues, it’s best to spend the time and meet as a team to go over all aspects of a job to update the WIP. Cover all the bases: billings, change orders, any issues like delays, cost overruns, etc. Get the whole picture of your jobs every month and utilize the team at Corrigan Krause to help you plan for the most profitable outcome.
The Whole Picture
Now that you have your WIP updated and a process in place to ensure it stays that way, what is your WIP telling you?
Aside from balancing work and billing, your WIP makes it much easier for everyone to know where any job stands at a given moment. This helps for planning staff and materials. You’re able to monitor for profit fade, cash flow or any other issues that may arise and be proactive in implementing appropriate solutions.
Contact the professionals at Corrigan Krause for assistance on how to set up your WIP and how to keep it up-to-date.