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What is a Work in Progress Schedule Report (WIP) in Construction?
A work in progress schedule, also referred to as a WIP report, shows where a project stands in terms of completion and billing as of a certain date. It’s an important management tool for keeping a project on track and financially healthy.
How Often Are Work in Progress Reports Generated?
There is no hard and fast rule governing how frequently WIP reports should be produced on a given project. Ideally, key project personnel, particularly the project manager, is getting together with the accounting folks on a regular basis, perhaps even weekly. During those meetings, information is shared and inconsistencies are addressed.
The project budget and schedule are rough benchmarks for where the project should stand at any particular point in time. Construction companies commonly use the percentage of completion accounting model. Costs that have been billed are deducted from the total gross profit forecast for the project to show how much profit is left to be realized and how much work is left to be done.
A WIP report might be generated when the project is approximately 25% completed, 50%, 75%, or even 90% completed. But the status of a project in terms of work completed and costs billed should be a topic for ongoing discussion, not something addressed only at the point that a report needs to be prepared.
What Does a WIP Report Include?
In addition to the percentage of work completed, a WIP report shows all costs billed to that point. These are considered underbillings if they lag behind the actual progress on the project or overbillings if they exceed actual progress. For example, a project that is 50% completed but for which billings are at 40% of the total project cost, there is an underbilling of 10%. That underbilling means the contractor is recognizing profits that have not yet been earned. Conversely, an overbilling means that the contractor has not yet recognized profits that have been earned.
Underbilling can result in the contractor having to put in capital to finish the project, and the actual profit margin will be lower than estimated. With overbilling, the profit margin could end up being higher than anticipated. Additionally, underbilling artificially inflates the income received to date, which can result in higher taxes. Overbillings artificially lower income and taxes.
There is no universally accepted format for WIP reports. Typically, multiple projects the contractor is engaged in appear on one report, with the data for each project on a different line. The information presented for each project generally consists of:
- The total contract amount
- Estimated total costs for the entire project
- Estimated gross profit on the project
- Costs billed to date
- The percentage of work completed
- Profit recognized to date
- Amount earned to date
- Amount billed
- Remaining cost to complete the project
- Overbilling or underbilling
Accounting can provide many of these figures, but project managers are on the job site and have a much better idea of where a project actually stands in terms of completion and the remaining cost of completion. Those with boots on the ground at a job site are best able to assess the accuracy of estimates.
There are many moving parts in any construction project. Conditions change, and costs can go up. Information about actual or potential delays, increased labor needs, higher than expected costs and so on need to be shared with the folks in Accounting, and adjustments may need to keep expectations realistic. Generating an accurate WIP report is a team effort that involves analyzing and addressing such issues as:
- Underbillings, which can negatively impact profits
- Uncollected receivables
- Unapproved change orders
- Discrepancies between the Accounting and field perceptions of the percent complete
Importance of Accurate WIP Reports for Performance Bonds
Typically, companies providing performance bonds for construction projects will review WIP reports for their own risk management purposes. The same is true for lenders providing financing for a project. Accurate WIP reports reveal issues and problems while there still is time for a contractor to address them and minimize their impact on the profitability of a project. A contractor’s reputation and continued ability to secure contracts depends on producing satisfactory outcomes, including a profit margin that meets or exceeds expectations.
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