No more garbage in garbage out. Can't wait right?!
Don't let the schedule scare you away, it's really not so bad! Pretty soon you'll want to create a WIP report for everything under the sun! The possibilities are endless!
Before we get carried away here, let's stick to the topic. The WIP on your financials. For now we'll stick with the inputs and get into the mechanics in another post. I want to emphasize that the following approach has been simplified. You'll want to consult your CPA regarding some nuances in revenue recognition that may apply specifically to your company.
Let's get started!
Contract Amount: This is the total price of the contract Including APPROVED CHANGE ORDERS through the most recent date. What that means is if your CPA or surety is bugging you about getting some information, say as of 12/31/X1 and its 2/1/X2, you'll want to use the contract price as of 2/1/X2, if it's significantly different. Now the question becomes, "well it'll probably change a week from now, and the following month, and so on and so on on, so am I just supposed to wait? When does it end?!" Great question! The answer is, it's an estimate and we're really looking for significant and APPROVED (OR LIKELY TO BE APPROVED) changes. Significant, what is significant? There's a lot of judgement here as you'll see in the following inputs as well. I'll tell you from experience that it varies, one man's $100,000 is another man's $1,000 and vice versa. The best option is to talk to your CPA!
Total Estimated Cost: What a beaut. This is what really drives the WIP report. It's the biggest estimate on your financials. There's a lot to discuss about this input that we'll have to share in later posts but we'll get into some of the detail here. This should include all of your direct costs and indirect costs to complete the project. Materials, labor, equipment, subcontractor costs, overhead, etc. If you're using the input method as way to measure progress to completion (a cost incurred drives you closer to completion), you'll want to monitor some of the costs going in there. This can get tricky but it's likely that if you stick with the main cost categories INCLUDING OVERHEAD (can't forget that one) you'll be fine. Similar to the contract amount, you'll want to use the most recent estimates. These can go up and down, we get it, but the best in class update these amounts at least monthly. So, similar to the example in the contract amount section, use the estimate as of the most recent date.
Cost to Date: Finally into some easy stuff, or maybe not! Cost to date is the total cost incurred on the project from inception through your report date. Cut-off is key here unlike the two previous inputs. What that means is if you're proving a WIP report through 12/31/X1 you'll want to include only costs incurred through that date. Something important to note here is that your cost to date per your WIP should reconcile to your cost to date in your accounting software, for a project. For example, if the WIP says project #1 has $100,000 in cost to date, you should be able to go into your job ledgers see $100,000. Reconciling is a very important step! We'll go further into this topic later when we start talking about accounting software, in a later post!
Billed to Date: Billed to date includes all of your progress billings through the report date INCLUDING RETAINAGE. Similar to cost to date, cut-off is key. So, if you're running a WIP report through 12/31/X1, you'll want to include on the billings through that date. Don't forget to reconcile! Just like cost to date, the billed to date per your WIP report should reconcile to your accounting software. Please don't forget this crucial step!
All done, right? Nope! Just because the template provided in a previous post has some fancy formulas to calculate WIP doesn't mean you're out in the clear. We need to know what the calculations mean. Too exciting right? I know.