The success of a WIP report depends on keeping accurate cost records and consistent documentation. If your records are accurate, it takes accounting to an entirely new level, allowing accurate projections all the way to the end of a project. This foresight allows construction firms to shift gears throughout the project to maximize profitability, potentially saving thousands of dollars on every job. Estimated numbers — or worse, handwritten, estimated numbers — and unintelligible WIP reports not only reduce the benefits of this crucial tool, but could actually harm your business in the long run. This damage can come in the form of overestimating profit or undermining the trust you’ve built with banks and surety companies. Goods-in-process is a part of an inventory account on the balance sheet of a company, relating to partially completed goods not yet ready for sale.

When precise financial information isn’t available, you can use real-time and historical data to identify recurring trends to more accurately estimate the percentage of the project that has been completed. If a project is over-billed, the work lags behind the pace of the billing, meaning that your customer is financing job costs. As we discussed in the Levelset article on overbilling, there is a natural, pragmatic tendency in the construction business to front-load, or overbill, towards the beginning of a project. Companies overbill to help offset the negative impact on cash flow caused by slow-paying customers . And of course, it’s always better to get your cash in hand sooner rather than later!

What is a Work-In-Progress (WIP) Construction Report?

Workers stationed at remote sites can also use the app, whether they have internet access or not. If they’re offline, then the app will sync once they’re back in range. Many teams opt to record WIP information on an Excel sheet, but we recommend using a live, cloud-hosted method instead. You’ll want to review these figures on an ongoing basis and will need to ensure that all data is up-to-date.

• On the balance sheet, over-billing is a short-term liability and under-billing is a short-term asset and if they are wrong the information is misleading.
• Once construction is complete, shift the CIP account to the appropriate fixed-asset account.
• If the data is a few days or even weeks out of date, you’ll lose the opportunity to spot issues that might have arisen in the meantime.
• Chief financial officer to maintain these records and avoid costly accounting errors.
• From there, you can determine whether you need to change your plan to get the project on track, or whether you can expect next month’s finances to make up the difference.

This suggests that industry-wide reported annual profits in any given year were likely overstated by more than a percent, which is huge when you consider that construction industry profits are low to begin with. If not, the cost estimate is off, the percent complete will be off, the over/underbillings will be wrong, and the income statement will be distorted. Worse yet, it can create unrealistic expectations of project managers and unwelcome surprises that contractors will have to address after the fact. The work-in-progress schedule essentially shows contractors whether active jobs are overbilled or underbilled.

AccountingTools

It is hard to bill when invoices are not getting approved and remitted timely. Make sure you have a company policy on getting costs input in the correct month. The WIP schedule has four major inputs that need to be updated as jobs are acquired and completed. We’ll deep-dive into all there is to know about WIP reporting and how you can set your projects and electrical business construction bookkeeping up for success. As you can see, building a WIP is fairly simple provided you have accurate financials, and by running regular WIP reporting, before and during construction, you’ll always know where you stand. By the end of Month 1, we can see that we were overbilled slightly by $1280 which presents a small liability because the owner has a claim on the uncompleted work.

GAAP compliant financial statements require revenue to be recognized as services are transferred to the customer—which does not always reconcile with the timing of billings. A WIP Schedule corrects the timing of the billings to show the revenue that should be earned. MarksNelson has many years of experience assisting clients prepare WIP schedules and evaluating the results to ensure complete and accurate reporting.

The Ultimate Guide to Retainage in the Construction Industry

Overbilled can also indicate that the job is doing better than expected or it may mean that there are costs missing on a job. These are great things to analyze and make sure you understand why a job is overbilled. This can be a great indicator if you aren’t billing enough on a job or if you missed billing a job each month.

• For this reason alone, the WIP report is an essential financial tool for contractors.
• For a multitude of reasons, it’s not uncommon to be over or under on billing at any given time and in itself, being in such a state doesn’t necessarily represent a problem.
• Or, worse, your company could go into debt should things slow down later in the year.
• As long as estimate costs account for all relevant change orders — approved, pending or needed — both accounting and project managers should be able to agree on this critical number.
• Financial managers, accounting and finance, senior management, and procurement should be in the room—and everyone should have the same information.

WIP reports are a project management and accounting tool that reveal the financial health of a project relative to its progress. They can identify red flags early-on, and help avoid profit fade down the road. Knowify’s suite of construction management tools enables contractors to track progress, and expenditures, monitor time, generate professional invoices, and develop reports to stay on top of every project. All combined, you’ll have a centralized tool to access everything you need to generate WIP reports quickly and efficiently.

IASB and FASB issue new, converged revenue standards

It shows that the contractor is either “billing in excess of cost” (over-billing) or has “costs in excess of billings” (under-billing). In the past, contractors relied on paper and a variety of methods to manage their accounting needs. The problem was the time and effort it took to consolidate the data and generate reports. As long as these numbers are accurate, the report can calculate everything else, like gross profit, percent complete,overbillings andunderbillings .

For this reason, any underbilling should fall into your asset account for financial reporting. For this same reason, contractors can rely on WIP reports to accurately determine where they stand during the entire course of a project. For example, you are underbilled if you have completed 75% of a project phase but have only billed your customer for 50%.