Work-in-progress (WIP) is a major inventory account for manufacturers, media and film companies, construction contractors, and other entities that enter into long-term contracts. WIP reports help management gauge the profit on each long-term project. To maximize profitability, it’s essential to regularly monitor these reports.
What should be included? There are many ways to create WIP reports, including spreadsheet programs and accounting software add-ons. Whichever method you use, the report should track key information for each project in progress, such as: Contract price (including approved change orders), Estimated job costs, Estimated gross profits, Costs incurred to date, Revenues recognized, Percentage of completion, Billings to date, and Billings in excess of earnings or earnings in excess of billings.
Most companies with long-term contracts run monthly WIP reports. But proactive managers run them weekly. Warning: The process requires a current and accurate assessment of estimated costs to complete each project. Otherwise, the information will be incorrect and could be misleading. How can you spot trouble? WIP reports can help you identify problems and take corrective action before the problems spiral out of control. For example, say a job is 25% complete but your costs incurred to date are 40% of budget. That’s not good, but thanks to your WIP report, you’ll have time to investigate, make adjustments and, one hopes, get the project back on track. WIP reports also indicate whether a job is underbilled or overbilled. Either situation is a potential red flag of financial trouble. But, in many cases, there’s a benign explanation.
For example, underbilling (that is, billing that fails to keep pace with a job’s progress) may be attributable to cost overruns, inefficient project management or sluggish billing. WIP reports can also help you spot “profit fade.” This is the gradual decline in projected gross profits over the course of a job. There are several potential causes of profit fade, including inaccurate estimates, lax project management and sloppy change order practices. Again, a WIP report can tip you off to project discrepancies before the job gets too far along.
For more on WIP reports WIP reports may initially seem overwhelming. But once you understand the terminology used and conditions that raise a red flag, the WIP report can be a powerful management tool. Our accounting team can help you create these reports and teach you how to monitor WIP on a regular basis. © 2017