Jobsites generate many things — dust, rubble, scrap metal. But they also generate a lot of information. And extracting the right financial data from an ongoing project in an accurate, timely and easily digestible manner is critical to maintaining that job’s profitability and avoiding losses.
Depending on the size and nature of your construction company, you may handle job status reporting in a variety of ways. Some contractors keep handwritten notes; others call up the home office and dictate important numbers to whoever keeps the books. Usually, however, creating formalized work in progress (WIP) reports is the best way to go.
Choose your data points
There are many ways to create WIP reports, including spreadsheet programs and specialized accounting software. Whichever method you use, the report should track key data points for each project in progress, such as contract price (including approved change orders), as well as estimated total job cost and gross profit by job. It should also indicate costs incurred to date on each job and the revenues you have recognized.
Don’t forget billings — a WIP report can tell you how much you’ve billed to date and billings in excess of earnings or earnings in excess of billings. The report can also show you the project’s overall percentage of completion.
Most contractors should run WIP reports at least monthly. But some companies review them every week. Warning: The process requires a current, complete and accurate assessment of estimated costs to complete for each project. Otherwise, the information will be incorrect and could be misleading.
Bill by the numbers
Monitoring WIP reports closely can help you recognize revenue more accurately, monitor profitability (or lack thereof) and spot red flags. 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 cash flow trouble but, in many cases, there’s a benign explanation.
For instance, 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 practices. Any one of these issues can portend cash flow difficulties. But underbilling may instead reflect less troublesome circumstances, such as a large number of legitimate change orders in various stages of approval, or significant front-loaded costs that will be recovered over the course of the project.
Overbilling, on the other hand, is usually viewed as a good thing. It’s generally defined as a contractor billing for contracted labor and materials before completing that work. Overbilling executed under strong management and billing practices is usually fine. It enhances cash flow and the work is done soon after invoicing.
Yet overbilling caused by substantial unrecorded costs may point to trouble down the road, because these expenses will manifest themselves eventually. Also, overbilling too much may leave you with nothing left to bill for while you’re still completing the project. That’s not good for cash flow. WIP reports can help you pace yourself appropriately.
Stop the fade
WIP reports can slow or stop profit fade, too. 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 initial estimates,
- Lax project management,
- Sloppy change order practices, and
- Unanticipated jobsite problems.
Again, the report’s data, when maintained and analyzed regularly and accurately, can tip you off to discrepancies that will put a drag on profits before the project gets too far along.
If you already produce WIP reports and use them to your advantage, kudos to your construction company. But if you don’t, or you haven’t revised or updated your methodology lately, it may be time to get crackin’ on a better job-status reporting process.
We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.