Understanding the Work In Progress (WIP) Report

A Work in Progress or WIP report is used by a contractor and its accounting staff to correctly recognize the Revenue being generated by that specific project and “balance” the amount of billings being posted so as not to overstate or understate income for the accounting period.

You begin by identifying 4 current values at the time the report is being run.

1. Current Contract Value, defined as the Original Contract Value signed by the customer, and adding any Approved Change Orders and Work Orders for work added after the contract is signed.
2. Current Billings, defined as the total amount of Invoices the contractor has submitted to the customer.
3. Current Cost Budget, defined as the Estimated Cost of the Original Contract plus Estimated Cost of Approved Change Orders and Work Orders.
4. Total Actual Costs, defined as the total of all Timecards, Expenses, and Bills posted to the Project to date.

Revenue for a construction project is recognized based on a Percent Complete basis. Percent Complete can be defined in multiple ways.

1. % complete based on % of Cost incurred compared to Cost Budget
2. % complete based on the Schedule
3. % complete as submitted by a Project Manager who has a good feel for how far the project has progressed.

Within the Contractor Foreman Work in Progress report, we calculate the Cost % Complete as this is the least subjective, and is defined as (Total Actual Costs divided by the Current Cost Budget).

Next we display the Forecasted % Complete, which will be used in the final calculations on the report. If there is a Schedule being used for this project in Contractor Foreman, that % will be displayed in the report.

If there is no Schedule being used for this project, then the Project Manager should either agree with the Cost % Complete number and enter it in the WIP % field or enter a different value in the WIP % field on the Details tab of the Project record based on their judgement.

Earned Revenue is then calculated by multiplying the (Forecasted % Complete by the Current Contract Value), thereby establishing how much Revenue is “Earned” based on how close the project is to being completed.

Earned Revenue is then compared to the Current Billings submitted, and if Current Billings is larger than Earned Revenue, the difference is entered in the Over Billings column. If Current Billings is smaller than Earned Revenue, the difference is entered in the Under Billings column.

Each month the accounting staff runs this report and makes an adjusting entry to their Income Statement to reflect the proper values for their active projects. Then next month they reverse that entry, run the report(s) and make that month’s adjusting entry.

The significance of this report and its use is very important to Bonding Companies and Banks, who want to see that each project is properly “balanced” and the contractor is not using dollars from one or two projects to finance other projects.

The contractor, likewise does not want to be internally financing his active jobs by significantly underbilling them. It’s a good check and balance by the owner, the accountant, and the project manager to routinely analyze the projects.

As the fiscal year approaches, the contractor also wants to make sure his Revenue numbers are properly calculated so they are paying the appropriate amount of income taxes based on accurate profitability.