Managing progress and effective budgeting are critical for contractors but are tasks many find complex. Construction locations spread widely, and projects in various stages of completion, make the accuracy of calculations important. Reliable and accurate accounting ensures the progress and profitability of construction projects.
An invaluable tool in calculating the progress and value of ongoing work is work-in-progress (WIP) schedules. These financial documents help business owners and project managers oversee budgets, understand the completed work, and recognize what remains. They encourage a proactive approach to project management.
“Any contractors that work on lump-sum or fixed-price contracts have to track the progress on the project through the life of the project, from beginning all the way to the end,” said Rob Mercado, CPA, CCIFP, managing director at CBIZ. At the end of a reporting period, a CPA is tasked with issuing a report that brings any projects up to that point in time. “The work-in-progress schedule allows us to calculate at that moment how much revenue was earned through that date.”
Because WIP schedules are essential for project management and are inherently nuanced and detailed, they’ll be a session topic at the upcoming AICPA & CIMA Construction Fundamentals Program, July 15–16. This virtual program will give you key insights to leverage your accounting expertise in the construction industry.
Proactive approaches start with WIP schedules
In construction, revenues and costs are linked. As an accountant, you can identify, track, and calculate revenue whether a project is complete or not. WIP schedules enable revenue recognition, creating a more precise indicator of financial performance.
“Contractors record revenue as costs that are incurred on a project,” said Mercado, who will be speaking at the upcoming Construction Fundamentals Program. “Revenue for contractors is not generated by requisitioning a customer. Revenue is generated through a calculation, the percentage of completion.” In the construction industry, said Mercado, billing is referred to as requisition.
For example, the contractor spends $250,000 on a project with a $1 million budget — the project is 25% complete at that point. “Then you record 25% of the revenue at that time and 25% of the gross profit at that time,” explained Mercado. “Requisition doesn’t mean anything. It’s just a cashflow mechanism. When a contractor requisitions for money, that’s not revenue. They have to incur costs to create revenue.”
An effective work-in-progress schedule includes the contract price, an estimated total project cost, and costs and requisitions to date.
“There are details in each one of these categories and you have to understand what’s happening in each one,” said Mercado. “Otherwise, the numbers will be completely different or completely wrong.”
A clear breakdown of a project’s costs, requisitions, and revenue provided within a WIP schedule increases transparency among internal and external parties and reinforces financial accountability within a construction firm. WIP schedules can reduce billing disputes and help ensure the business is meeting contractual obligations.
Best practices for WIP schedules
WIP schedules help streamline processes in a very complex industry. Because they play such a vital role in project and financial management, there are best practices that ensure a report’s accuracy and reliability.
WIP schedules are commonly updated monthly, and numbers should be crosschecked against other financial statements. To ensure alignment, conversations should be held with project managers and other interested parties. The WIP schedule will help accounting and project management either agree with how the project is progressing or reveal a misalignment that needs reconciling.
Mercado said that many small business owners simply don’t prepare WIP schedules, leaving them in the dark about their company’s own financial health. And for the reports to be truly reflective and useful, proper figures and calculations are required.
“If you’re not using apples to apples in these calculations, you’re going to be giving false information, not realizing you’re giving false information,” he said.
Build a strong career in construction accounting
Construction businesses have an incredibly high failure rate — 35.9% of construction companies founded in March 2011 remained in operation by March 2022, according to U.S. Bureau of Labor Statistics. Many businesses don’t see their fifth anniversary. Poor cash-flow management contributes to the grim success rate.
“A lot of people don’t understand that everything is based off of an estimate. The whole financial statement is based on an estimate,” said Mercado. “If you don’t know how to estimate your projects and you don’t know how to track the progression of the project, you’re going to be in a situation where you won’t know that you lost money.”
Proper internal reporting, of which a WIP schedule is a significant driver, is critical. As an accounting professional, your keen attention to detail and familiarity with financial statements and reports will be assets. The accurate and detailed schedules you provide business owners will enable them to identify any potential challenges and empower informed decision-making among project managers and business owners.
Learn the fundamentals and reinforce your future in a growing industry. The AICPA & CIMA Construction Fundamentals Program kicks off on Tuesday, July 15. Register for the two-day, virtual program today.