If you are a new construction company you likely know about a Work-In-Process schedule, commonly referred to as a WIP Schedule. WIP schedules are an important aspect of construction accounting for tracking a project progress and profitability, but it is also an important component when it comes to financial statements.
WIP schedules compose of a variety of line items in the financial statements. Revenue and expenses are transposed to the income statement; costs in excess of billings and billings in excess of costs are transposed to the balance sheet. When reviewing your financial position within a construction company, the WIP schedule is the driving force of determining the health of your company. Accurately recording your costs to date, billed to date, and knowing the gap between contract value and estimated costs is a key component of maintaining and understanding the WIP Schedule.
A common WIP Schedule receives input from four areas: contract value, budget, costs to date, and billed to date.
- Contract value can range in methodology – lump sum, unit price, and time and material are all viable options for recording contract value. In short, this is the total gross revenue you expect to receive for a project.
- Budget is the estimated costs to complete and is highly subjective in an economy with moving price points. This becomes especially challenging in a contract to be completed in stages and not all costs are purchased at the inception date of the project. Determining your costs needs to also include the overhead costs: the indirect costs of running a business.
- Costs to date seems straightforward but can have its own complexities considering the inclusion of overhead and your allocation method. How much payroll do you recognize as overhead for a project if you have multiple projects occurring at the same time and at different stages? Equipment, and other indirect expenses also need to be allocated if you are engaged in multiple projects.
- Billed to date is the determining factor of whether you have under-billings at the end of a period (asset) or over-billings (liability). Ensuring you are billing in the appropriate period for the correct amounts is a large determining factor for revenue recognition with contract revenue, and ensuring your financials are not misstated.
Inside the WIP schedule, these 4 inputs feed your estimated profit, percentage of completion, profit to date, earnings to date, under billing, over billing, cost to complete, and remaining contract value. These calculations are valuable tools for a company to examine and assess their ability to turn a profit.
Without accuracy in your WIP Schedule, your financial statements for a period could be misstated and turn away potential equity investors, or banks when seeking a loan.
ADKF, PC is the largest, locally owned public accounting firm in San Antonio, Texas. Possessing vast experience in working with construction companies ensuring their WIP schedules are accurate and financial statements presented fairly, we have served the community since 1991 in matters related to financial statements. We would love to discuss the presentation expectations of WIP schedules as well as what is required for your financial statement disclosures. Don’t hesitate to reach out to us if you’re a construction company needing assistance on how to properly apply, or review, your business’ WIP schedule.