The development of a Work in Progress (WIP) report is by far the single most important financial-related function performed in a construction company for determining factor of stated profitability. Without an accurate calculation of Work in Progress, in general, financial results are meaningless. Calculate it wrong and you can end up like Enron!
Many companies do not know how to conduct the calculation, while others think they know and are in error; as a result, numerous financial decisions are made based on flawed financial information. This single calculation can swing what appears to be gross profitability into gross loss by miscalculation. Our experience indicates the majority of middle market companies don’t know the necessary procedures to assemble an accurate Work in Progress report . Many think that it is a calculation of under or over billing derived from billing versus percent of work complete. Work in Progress calculations stem from the cost-to-complete the work as opposed to the cost-to-date only. Performing an accurate cost-to-complete requires a detailed system that includes accurate data collection, cost analysis, and estimation.
In order to calculate it properly, an interface between those controlling the progress on the job (Project Managers, Superintendents, Foremen, or even Ownership) and the Accounting Department (Contract Administrator, AR, Controller or the CFO) is required. The interface between these departments needs to follow a disciplined monthly procedure to produce accurate and meaningful results.
Some firms watch their financial results move from profit to loss and back to profit wondering how this could be, and further questioning what job it is that is causing this, whereas an accurate analysis provides all the answers and will allow them to anticipate the end results of their projects more clearly, and better control costs during the progress.
We have mentored many in this regard and have turned “roller-coaster” financial data into meaningful information that shows trends and clearly identifies projects that deserve attention. Call us today! This might very well be the most important call you’ve ever made – and just might solidify your financial reports forever.