Best Practices for Maintaining a Work In Progress (WIP) Schedule in Construction Accounting

Managing the progress and profitability of large, long-term construction projects can be a significant challenge. In construction accounting, costs drive revenue. Keeping a firm grasp on the labor, materials and overhead of every project your construction company is working on can be a complex undertaking.

The work in progress schedule, or WIP schedule, is an essential financial document that tracks the progression of each of your company’s current projects. This helps business owners better manage costs, gauge progress and understand profitability.

The WIP schedule is a financial report that’s unique to the construction industry, and it’s one that construction company owners must understand. That’s why, in this overview, we’ll explain the key elements of the WIP schedule. We’ll also share a series of best practices you can adopt to ensure your construction company’s WIP schedules enable you to build your business on a solid financial footing.

What is a WIP Schedule?

A WIP schedule displays the progress of ongoing construction projects.

In construction accounting, revenues are tied to costs. If a construction company has incurred 70% of the costs budgeted for a project, it should recognize 70% of the revenue. The WIP schedule is the document where these costs and the associated billings are tracked.

By assessing the WIP schedule, construction company owners (as well as partners such as surety companies and banks) can understand the progression of active projects. Each project should have its own line, and the WIP schedule should be used to proactively manage evolving budgets.

Key Elements of a WIP Schedule

Unlike more traditional financial statements such as income statements or balance sheets, there is no universally accepted format for a WIP schedule. However, regardless of the format your company uses, certain financial information should be included.

Make sure that your WIP schedule includes all of the following elements:

• Contract Value
• Estimated Gross Profit
• Current Period Revenue
• Current Period Costs
• Current Period Gross Profit
• Revenue Recognized to Date
• Costs to Date
• Gross Profit to Date
• The Percentage of Work Completed
• Revenue Billed to Date
• Contract Assets and Liabilities (formerly just underbillings and overbillings)

If you haven’t used a WIP schedule before, it’s best practice to partner with an experienced construction CPA to establish the financial tracking and reporting infrastructure required to maintain an accurate WIP schedule.

4 Best Practices for Maintaining a WIP Schedule

WIP schedules are extremely important documents, both for internal project management purposes and for external partners with an interest in your projects.

By maintaining a precise, timely WIP schedule and actively studying it on a regular basis, construction company owners can gain the financial insight they need to proactively identify opportunities and stay ahead of potential issues. That allows them to take the actions required to ensure cash flow remains consistent and their projects remain profitable.

Keeping an accurate WIP schedule across multiple projects can be a relatively complex undertaking. Construction company owners should bear the following best practices in mind to ensure the highest levels of accuracy and insight.

1. Update the WIP Schedule Monthly

By committing to updating their WIP schedule on a monthly basis, construction companies can make decisions based on an up-to-date understanding of progress and costs. It’s best practice to produce WIP schedules for each project as part of the month-end close process.

Some construction companies opt to run a WIP schedule every quarter, or even just at the end of a project – an approach we don’t recommend. This can lead to cash flow issues, with the potential for unexpected cost overruns or project delays that can cause serious financial challenges.

If your company is performing bonded work, your surety may require you to share an updated WIP schedule each month. This is especially the case if you’re in a new working relationship or taking on a much larger project than usual.

2. Discuss with Project Managers and Accountants

A WIP schedule provides insight into the progress and profitability of each project. That said, it’s only a useful tool if you use it to drive action. Each month, construction company owners should meet with their project managers to assess the latest WIP schedule for each job.

These meetings are essential to ensuring the WIP schedule represents an accurate characterization of the project’s progress. Perhaps bad weather has seen the project fall behind schedule and costs have risen. In that instance, the WIP schedule needs to be updated to account for an increase in the estimated costs to finish the project, and your revenue recognition and billings may need to change accordingly.

3. Share with Surety Partners

If your construction company is working on government or public works projects, it probably had to secure a surety bond before proceeding with the work. As the underwriter for your project, the surety will often require that you keep them updated on the project’s progress by sharing your WIP schedule on a regular basis.

If your relationship with a surety is relatively new, or if you have secured bonding for a project that is significantly larger than your typical scope of work, you’ll likely be required to share your WIP schedule monthly. Once the surety becomes more comfortable with your ability to successfully manage project costs and progress, sharing a WIP schedule on a quarterly basis is more common.

4. Ensure Consistency with Other Financial Statements

The figures on the WIP schedule should match up with the figures included in the other financial statements your construction company produces every month. When preparing a WIP schedule, make sure the following three criteria are met:

• Year to Date (YTD) revenue on the WIP schedule matches YTD construction revenue on the income statement.
• YTD Costs of Goods Sold (COGS) on the WIP schedule agree to the YTD COGS on the income statement.
• Contract assets and liabilities on the WIP schedule match those on the balance sheet.

Ensuring the figures on the WIP schedule match those on other financial statements is key to accurately gauging the financial health of your business.

James Moore: Experienced Construction CPAs and Advisors

By producing accurate WIP reports in a timely manner, your construction company can proactively identify and address issues with your projects. Without a WIP schedule, you lack any real understanding of the progress and profitability of your projects –  a position that sees many construction companies run into financial challenges.

At James Moore, our construction CPAs and advisors have a wealth of experience supporting construction companies with the WIP process. Our professionals provide support in a variety of ways, from establishing accounting systems to better track and organize project costs to helping companies produce and review their WIP schedule each month.

If you’d prefer to develop these capabilities in house, our advisors are also available to train you and your staff on the best practices to create, update and interpret your WIP schedule. To learn more about our accounting services for construction companies, contact an advisor today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.