Making Your Work-in-Process Schedule Work For YouJuly 05, 2017
The single most important piece of financial information contractors produce is the work-in-process (or WIP) schedule. While this statement is often met with skepticism, a properly maintained WIP schedule can actually drive profit to the bottom line. This single schedule can turn your accounting and finance function into a profit center when prepared and used in a timely and effective manner.
All too often, contractors rely on “feel” or “gut” to monitor the life blood of their companies. However, companies that treat their WIP schedules with the care and diligence they deserve put themselves at a distinct competitive advantage over those that fail to do so.
Creating Your WIP Schedule: The Four Key Numbers
A contractor’s typical WIP schedule is driven predominately by four numbers: 1) costs incurred to date; 2) billings to date; 3) actual contract value; and 4) estimated costs to complete. In this article, we’ll discuss what contractors need to do to create a WIP schedule that helps drive profits.
Let’s start with the first two numbers—costs incurred and billings, both of which come directly from the accounting system. There are several key factors that must be in place to ensure that your costs incurred and billings are ready to be relied upon as part of the WIP schedule.
- Timeliness – Costs and billings need to be regularly updated in order for your WIP schedule to be effective. WIP schedules that get updated quarterly (or less) are not useful for anything other than a historical perspective on the business. For your WIP schedule to be a useful tool, contract values and costs to complete must be updated weekly and actual cost information must be as close to real time as is possible.
- Accuracy – It is imperative that costs are properly coded to jobs. Without this, the entire exercise of preparing a WIP schedule is meaningless.
- Thoroughness – Each job should include all direct costs (those costs specifically attributable to that particular job) and a portion of the indirect costs (those costs necessary to do work but not attributable to any one specific job) of the company’s operations. In order to effectively estimate new work, we must know what the work actually costs. Companies that show inflated gross profit on specific jobs and large amounts of unallocated indirect costs or overhead are at a disadvantage to those companies that know exactly what their projects cost them.
The next two numbers—actual contract value and estimated costs to complete—are a bit more complicated and require diligent reviews from your entire team. Project managers, accounting and finance personnel and senior management must work together to ensure these numbers are up-to-date and accurate.
When determining actual contract value, only approved change orders should be included in the final number. Putting a “maybe” change order in the contract value can cause the company to improperly recognize revenue and overstate profits should that change order get denied.
Determining estimated costs to complete requires the utmost scrutiny. In order to determine an accurate number, overly optimistic project managers must be challenged by skeptical accounting and senior management teams to support their position. The more emphasis and scrutiny that contractors place on this step, the less fade they will see on jobs. This has a direct impact on the control senior management has on the company’s true profits.
Maintaining Your WIP Schedule: Regular Communication is Key
The next step in putting your WIP schedule to work for you is scheduling regular project manager meetings. High-performing companies will put project managers, estimators, accounting and finance personnel, and senior management in a room with everyone looking at the same information. If everyone is working off a properly prepared WIP schedule, it’s much easier to compare and analyze jobs accurately. In addition, this group setting will encourage project managers to be more on top of their jobs and avoid the need to explain why jobs are over budget. The idea of these meetings is to encourage friendly competition and collaboration while at the same time holding project managers and estimators accountable for job performance.
The most common push-back to conducting these regular meetings is working around project managers’ busy schedules. A common workaround is to hold meetings at the job site itself. This has multiple benefits. Project managers in the office are likely to be happy to go out to the field; plus, having a project manager meeting at a job site gives the group a real time example to assist in working through issues that may arise.
The effective and diligent use of your WIP schedule is ultimately where you can turn your accounting and finance function into a profit center. You’ve heard the expression that “numbers don’t lie” – the advantages an accurate WIP schedule can bring to your company’s bottom line is the perfect example.
For more information or additional questions, please contact Tom Dearnley, firstname.lastname@example.org
How BlumShapiro Can Help
Like your business, BlumShapiro is a hands-on firm with a group dedicated solely to the construction industry. From our work in damage claims negotiations, we have gained insight into the real costs of projects and their impact on a contractor’s bottom line. Numerous clients rely on our professionals for advice on allocating costs in the bidding process to maximize profitable work. Together we’ll work to see that a sound financial plan is developed and implemented to help your business grow and succeed. Learn more about our construction services >>