Is Your Year-End WIP Schedule Audit Ready?

Many contractors cringe at the task of preparing their year-end work-in-process (WIP) schedule. In reality, the WIP schedule is a key financial analysis tool, not just a math exercise. While best-in-class contractors prepare WIP schedules monthly or quarterly at a minimum, the year-end WIP schedule requires additional care. Because it is subject to increased scrutiny by your CPA, errors and inconsistencies can lead to audit delays, increased fees, and missed reporting deadlines. Furthermore, multiple corrections to the WIP schedule can lead to unexpected changes to reported revenue and operating results. Below are some key areas contractors should focus on when preparing the WIP schedule for their year-end audit.

8 Tips to Prepare an Audit-Ready Year-End WIP Schedule

1. Prepare Your WIP Schedule in CPA-Ready Format

Use Excel or another spreadsheet application rather than a system-generated report or PDF file. This will make calculations, final edits, and formatting changes easier and more efficient for your CPA (which can keep your audit fees to a minimum). If you frequently have jobs that span over more than one year, be sure to add columns to reconcile year-to-date revenue and costs, as well as job-to-date revenue and costs.

2. Make Sure WIP Schedule Data is Accurate and Reconciled

Make sure the data flowing into the WIP schedule is accurate and reconciles to the underlying accounting records. There are four key data inputs from the accounting system that drive all the calculations included in the WIP schedule:

• Contract value
• Costs to date
• Total estimated costs
• Billings to date (including retainage)

Establish reasonable cut-off procedures to make sure new transactions are not added to the general ledger after this data has been exported. Conversely, if corrections need to be made to the ledger after export, make sure the job data in the WIP schedule is also updated.

3. Take a Second Look at Contract Values and Pending Change Orders

The contract value can be a fluid amount as scope changes, claims, change orders, contingencies, and other events arise. Change orders or other contract changes that are approved as of the balance sheet date should always be included in the WIP schedule. Further judgment should be made on whether the contract value should be adjusted for unapproved change orders or other pending contract changes. The basic rule of thumb is to include only amounts that are likely to be approved or accepted. These assessments can be complicated—if you’re unsure how to approach them, it is best to discuss them with your CPA ahead of time.

4. Review the Cost Estimates and Make Sure They Are up to Date

As scope changes are mandated and change orders are approved, cost estimates should be updated to reflect the most accurate depiction of the costs expected on the job. Pay attention to labor estimates; if weather or other delays cause employees to work overtime, make sure the overtime premiums are incorporated into the cost estimates. Lastly, changing economic conditions could cause volatility in the prices for materials and other job costs. If your original bid did not account for these changes, the job estimates should be closely reviewed and adjusted.

5. Apply a Consistent Methodology for Calculating Percentage of Completion

The most common methodology is to calculate the percentage using costs to date versus total estimated costs (cost-to-cost). If you decide on a different method (such as labor hours or an output-based methodology), it should reflect actual progress on the job.

6. Make Appropriate Adjustments for Expected Losses on Jobs

Generally Accepted Accounting Principles (GAAP) require losses to be fully accrued when expected. The accrual of losses will impact the earned revenue calculated on the job. Accordingly, the formula for calculating revenue will require some tweaking. Your CPA can provide formulas and templates for these calculations if needed.

7. Prepare Profit Fade and Gain Analysis for Jobs Open in the Prior Year

Your CPA will most definitely have questions about projects with significant year-over-year fluctuations in profitability. Be prepared to discuss the underlying reasons for any profit fade or gain.

8. Review Jobs With Unusually Large Underbillings and Overbillings

Material under- or overbillings are not automatic red flags, but they should be explainable. Be prepared to discuss the underlying reasons with your CPA.

Importance of a Well-Supported WIP Schedule

Auditors immediately recognize the difference between a rushed WIP schedule and one prepared with discipline and intent. Contractors who invest the effort to produce an accurate, well-supported WIP schedule typically experience fewer audit adjustments, fewer surprises, and greater confidence in their year-end results. If you have any questions or need assistance, please get in touch with us using the form below.