Part 4: Things to look out for when calculating WIP
Updated: Aug 23, 2022
There are a couple common errors we need to look out for when building the report.
1) Billings to date greater than the contract amount: How can this be? Fortunately for the universe, we've added a feature in the template to highlight such a scenario when it happens. This is typically caused by the following factors; a) Contract amount does not include approved change orders b) including billings for other services in the project billings c) including billings from the subsequent period. There are other reasons but from my experience, these are the most common. Let's briefly discuss these issues.
a) If you've got an approved change order (approved by the engineer/owner and
yourself) you should include that in the contract amount. "When should I call it quits in terms of including change orders to the contract amount? I've got to close the books." I hear you asking. Great question! The response is...wait for it... IT DEPENDS! How much are we talking about. This is based on judgement, something you would run by your CPA. If you have a $5,000 change order on a $100,000 contract, it may not be as big of a deal. A change order of $10,000 or more may sway that decision and you may end up including it in your WIP calculation.
b) You're providing maintenance services for the same owner under a different contract so you've decided to include those billings and and costs for that matter in the WIP calculation. Your contract amount and total estimated costs don't incorporate these additional services so your calculation won't reflect the activity of the project. It's best to separate the service revenues out from your construction projects.
c) Don't include billings subsequent to the period you're reporting on. If your financials are as of December 31st for example, don't include the billings from January of the following year.
2) Cost to date higher than the total estimated cost: Negative cost to complete! You're an overachiever! I'm sure you're an overachiever but for other reasons! Negative cost to complete likely means you haven't updated your total estimated costs. Similar to the change order discussion above at point a), you'll want to monitor changes in the budget to update the total project costs. If a project is open/incomplete, there should be some costs to be incurred. The WIP template has you covered again! Your cost to complete will be highlighted if you have negative cost to complete.
You're on your way to reenacting the photo above! Get a calculator and lay out some colorful graphs in from of you! We're moving on to ratio analysis!