Best Practices for Preparing Construction Year-End WIP Schedules

In Summary:

• Maintain Data Accuracy: Effective WIP schedules require up-to-date contract values, inclusive of approved change orders, and precise “costs to complete” for every active project.
• Perform Regular Reconciliations: Contractors should verify that current year revenue, costs, and gross profits align perfectly with the income statement and general ledger to avoid financial discrepancies.
• Analyze Performance Metrics: Rigorous review of overbillings, underbillings, and profit margins allows management to identify cost overruns and evaluate the overall financial health of each job.

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Managing the progress and profitability of long-term construction projects is a challenge. Work-in-progress (WIP) schedules help contractors recognize revenue and costs accurately over the life of a project and provide a clear snapshot of project performance, cash flow, and financial health. However, compiling this report can be complex. Here are a few best practices for creating a precise and compliant year-end WIP schedule. 

Importance of the Work-In-Progress Schedule 

WIP schedules enable businesses to accurately track job progress at a point in time and identify inaccurate or missing cost information. For example, WIP schedules can help contractors identify inefficiencies and cost overruns, and assess the necessary changes to cost estimates to complete the job. They also help track contract value and can be crucial in making sure change orders are executed and approved. 

Profitability metrics from the WIP schedule can serve as performance benchmarks for contract managers, superintendents, and other management personnel. These metrics provide key calculations for proper revenue recognition in accordance with generally accepted accounting standards (GAAP) and calculate underbillings and overbillings by job. 

The WIP schedule is a key accounting exercise and should be compared and reconciled to other accounting data to maintain accurate financial reporting. 

Key Elements of an Accurate WIP Schedule 

Several key components must be incorporated into the WIP schedule. An accurate WIP schedule should: 

• Include all jobs that had activity during the year (activity includes labor hours, other job costs, and customer billings). 
• Exclude prior years’ closed jobs with no current year activity. 
• Reflect the most up-to-date job contract value (including approved change orders) and accurate estimates of “costs to complete” for each job. 
• Include cumulative billings to date for each job and reconcile to the accounting ledger. 
• Include cumulative job costs charged to each job and reconcile to the accounting ledger. 
• Reflect accurate calculations by job for gross profit percentage, percentage of completion, and earned revenue to date. 

Analyzing Your Construction WIP Schedule 

The metrics for each job should be closely reviewed and analyzed to make sure the presentation of the job is accurate. When reviewing their WIP schedules, contractors should watch for the following: 

• Are there jobs on the current year’s schedule that were closed in the prior year? 
• Are there jobs that are showing as more than 100% complete? 
• Are there jobs that are showing as more than 100% billed? 
• Are there jobs that were 100% complete, but not 100% billed? 
• Are there excessive overbillings or underbillings on jobs? 
• Is a job being bid at a loss or a breakeven? 
• Are there jobs sitting at close to 100% complete that should be showing 100% complete? 
• Is the job’s gross profit far above or below the typical gross profit? 
• Has the job gross profit significantly gained or faded since last year/quarter/month (depending on how often the WIP schedule is reviewed)? 

If anything stands out after you analyze the job schedule based on the above questions, we recommend you review a few important pieces of the job schedule: 

• Check your formulas to make sure a formula error is not causing issues. 
• Review the contract price to see if it needs to be adjusted for change orders or deductions. 
• Review the job-to-date costs incurred to make sure all costs have been appropriately charged to the correct job and no accrued costs are missing. 
• Review the total estimated costs and/or estimated costs to complete the job to make sure they show the most accurate picture of job costs. 

Before sending the job schedule to your CPA or any outside party, we recommend the following: 

• In total, reconcile the prior year job-to-date revenue, costs, and gross profit back to the prior year financial statements issued. 
• In total, reconcile the overbillings and underbillings to the trial balance. 
• In total, reconcile the current year revenue, costs, and gross profit back to the current year income statement. 

Best Practices for Construction WIP Reporting 

Establishing and adhering to best practices is essential for producing a reliable and accurate year-end WIP schedule. By conducting periodic reviews and reconciliations, businesses can identify discrepancies early and make sure that all figures are supported by verifiable data. If you have questions or need assistance, please use the form below to contact us. Our construction group has decades of experience working with construction companies and can help make sure your WIP schedules are accurate and GAAP-compliant.