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How do you know you're calculating WIP correctly?

Updated: Jan 14



You'll never really know if you're calculating WIP correctly. That doesn't mean you should lose all hope. There are three things you should really "know" when building your WIP report.


  1. Contract Price: The contract price you have listed on your WIP report should agree to the contract amount, including approved change orders, on your contract with the project owner (or general contractor).

  2. Cost to Date: Cost to date used on the WIP report should agree to your project sub-ledger in your accounting software. If you have recorded costs of $100,000 through December 2023 and have incurred $15,000 in additional costs through January 2024 (for work performed in 2024), your cost to date through December 31, 2023 is $100,000, not the cost incurred through the most recent date.

  3. Billings to Date: Same concept as costs. Your billings to date must agree to your job sub-ledgers, including retainage, if applicable. If your most recent progress billing is after your reporting period, exclude it. You want to include what's been actually billed through the period end date, which should agree to what your accounting software shows.


What you won't really "know" is your total estimated cost. But your over/underbillings should give you an indication if you're on the right track.


  1. High Underbillings: High underbillings may mean your total estimated cost is too low. You may be looking at higher total costs than originally anticipated because what you're saying is "hey I'm going to make a lot of money, it just hasn't happened yet!". You may make a lot of money on the project, but if you have a history of saying that and often disappoint, you should increase your total estimated cost. Your current gross profit based on billings to date less cost to date, should speak to that somewhat to your expected "home run". If you're always "behind", it looks suspicious, so you may want to increase total estimated costs.

  2. High Overbillings: High overbilling may mean you're being too conservative with your total estimated cost. You're saying "I don't think I'm going to be making that much money" but your activity is showing otherwise. Again, that could be the case. Maybe you've front loaded the project and your gross profit (billings to date less cost to date) will start to decrease further along the project. Or maybe you really are knocking it out of the park but your hesitant to decrease your total estimated cost. You want to remain conservative, I get it. It's always best to write up gross profit than to write it down, but having high overbillings can still make your WIP look goofy and raise suspicions by your underwriter.

As far as your percent complete, revenues earned, over/underbillings on your WIP report, the formulas on your spreadsheet should take care of that. I recommend you double check your formulas and recalculate WIP separately just in case a formula is broken. One quick calculation is to divide your cost to date by 1 minus your estimated gross profit percentage to calculate reveunes earned. If revenues earned is more than your billings, than you have an underbilling for the difference between the two. If revenues earned is less than your billings to date, you have an overbilling for the difference. Those differences should agree to your spreadsheet or at least come very close to that amount.


Hope that all made sense!


If not, don't hesitate to reach out!


Ara





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