When evaluating the financial performance of a construction company, lenders, sureties and other stakeholders often want more than just an income statement, balance sheet and statement of cash flows. Although these three traditional parts of financial statements are critical, they report only historical results. Many interested parties want something more current and, ideally, forward looking.

That’s where work-in-progress (WIP) schedules come in. These supplements to financial statements do a much better job of revealing the current strengths and weaknesses of the construction business in question. And for this very reason, WIP schedules also serve as a wonderful tool for contractors and their leadership teams.

Critical information

Essentially, WIP schedules track critical information about ongoing jobs. Pertinent data points include contract value, estimated costs, estimated gross profits, costs incurred to date, revenues recognized, percentage of completion and billings to date.

To garner the most value from WIP schedules, your construction business should generate one at least monthly. Some companies even review them weekly. Monitoring this information can help you recognize revenue accurately, assess whether jobs are on target to be profitable and detect early warnings of potential problems.

Red flags

Indeed, by monitoring jobs in something approaching real time, WIP schedules can raise red flags while there’s still time to address the related issue. For example, a comparison of billings to date with revenue recognized can reveal underbillings or overbillings.

As the name suggests, underbillings refer to billings that fail to keep up with a job’s progress in terms of revenue recognized. There are many potential explanations for this phenomenon, some troublesome and some benign.

If underbillings result from cost overruns, poor project management or delays in billing, for example, they may be a warning sign of potential cash flow problems in the future. On the other hand, if underbillings can be explained by other factors, they may not be cause for concern.

For example, perhaps you have unapproved but legitimate change orders or front-loaded costs that will be recovered over the course of the project. The key is to understand the underlying causes of underbillings and be prepared to correct any of the deficiencies causing them.

Similarly, overbillings may or may not be a warning sign of potential financial trouble. This is when a contractor bills for labor or materials before the related work is completed. When done within the rules, overbillings may reflect strong project management and diligent billing practices. On the other hand, if they reflect poor or incomplete documentation, or that revenue from one project is being used to cover costs on another, overbillings may be a major red flag.

WIP schedules can also provide an early warning of profit fade—that is, when estimated gross profits gradually decline over the course of a job. Possible causes include subpar project management, sloppy estimating or poor change order management — all things that may be fixable with sufficient warning.

Now’s the time

Regularly supplementing well-prepared financial statements with WIP schedules is among the most effective ways to monitor your construction business’s financial status. If you haven’t been doing this regularly, or at all, now’s a good time to start. Your CPA can serve as an invaluable resource in setting up and maintaining these schedules.

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