In the construction industry, financial clarity is critical. Projects often span months or years, involve multiple stakeholders, and require significant upfront investment. To keep everything on track, contractors rely on a powerful tool: the Work-in-Progress (WIP) report. While many understand its importance, fewer know how to prepare one correctly. This guide will walk you through the process of creating an accurate WIP report and explain why it’s essential for your business.
What Is a WIP Report?
A Work-in-Progress (WIP) report, also called a WIP schedule, is a financial document that tracks the status of active construction projects. It compares actual costs and billings to the estimated contract value and progress, providing a real-time snapshot of financial performance. The WIP report helps contractors answer critical questions:
- How much work has been completed?
- How much has been billed?
- Are we overbilled or underbilled?
Understanding these metrics is vital for managing cash flow, ensuring profitability, and maintaining compliance with accounting standards.
Why Preparing a WIP Report Matters
Before diving into the steps, let’s clarify why this process is so important:
- Financial Accuracy: Ensures revenue recognition aligns with the percentage-of-completion method.
- Cash Flow Management: Identifies underbilled jobs that may be draining resources.
- Project Oversight: Highlights cost overruns early, allowing for corrective action.
- Bonding and Credit: Lenders and sureties often require WIP schedules to assess financial stability.
- Strategic Planning: Provides insights for better bidding and resource allocation decisions.
Step-by-Step Guide to Preparing a WIP Report
Step 1: Gather Key Project Data
Start by collecting accurate, up-to-date information for each active job. You’ll need:
- Original Contract Value: The agreed-upon amount for the project, including approved change orders.
- Estimated Total Cost: The projected cost to complete the job.
- Costs to Date: Actual costs incurred so far, including labor, materials, and allocated overhead.
- Billings to Date: The total amount invoiced to the client.
Accuracy at this stage is critical. Incomplete or outdated data will lead to misleading results.
Step 2: Calculate Percentage of Completion
The percentage of completion shows how far along the project is based on costs incurred. The most common formula is:[\text = \frac{\text}{\text}]
This method assumes costs are a reliable indicator of progress, which is generally true for most construction projects.
Step 3: Determine Earned Revenue
Once you know the percentage of completion, calculate the revenue earned to date:[\text = \text \times \text]
This figure represents the amount of revenue you should recognize based on work completed, regardless of how much you’ve billed.
Step 4: Compare Earned Revenue to Billings
Now, compare the earned revenue to the billings to date:
- If Billings > Earned Revenue, the job is overbilled.
- If Billings < Earned Revenue, the job is underbilled.
This comparison is crucial because it reveals whether you’re ahead or behind in billing relative to progress. Overbilling can improve short-term cash flow but may lead to profit fade later. Underbilling, on the other hand, ties up cash and can strain resources.
Step 5: Compile the WIP Schedule
Create a table that includes the following columns for each job:
- Job Name/Number
- Original Contract Value
- Approved Change Orders
- Revised Contract Value
- Estimated Total Cost
- Costs to Date
- Percentage Complete
- Earned Revenue
- Billings to Date
- Overbilling/Underbilling Amount
This table becomes your WIP report—a comprehensive view of your active projects’ financial health.
Best Practices for Preparing WIP Reports
- Update Regularly: Monthly updates ensure timely insights and allow for proactive decision-making.
- Collaborate Across Teams: Involve both accounting and project management to verify data accuracy.
- Use Construction-Specific Software: Automating WIP reporting reduces errors and saves time.
- Review Trends: Look beyond individual jobs to identify patterns, such as recurring underbilling or profit fade.
- Document Assumptions: If you adjust estimated costs or timelines, note the reasons for transparency.
Common Mistakes to Avoid
- Incomplete Data: Missing or outdated information leads to inaccurate reports.
- Failure to Update Estimates: If project costs change, update your WIP report immediately.
- Misinterpreting Results: Overbilling isn’t always good, and underbilling isn’t always bad. Context matters.
- Ignoring Red Flags: A WIP report is only useful if you act on the insights it provides.
Why Accuracy Matters
An inaccurate WIP report can mislead stakeholders, distort financial statements, and jeopardize bonding capacity. Conversely, a well-prepared WIP report builds trust with lenders, sureties, and clients while giving you the confidence to make informed decisions.
Final Thoughts
Preparing a WIP report may seem complex, but it’s one of the most valuable tools in construction accounting. By following these steps—gathering accurate data, calculating progress, determining earned revenue, and compiling a clear schedule—you can gain real-time visibility into your projects’ financial health.
In an industry where margins are tight and risks are high, mastering WIP reporting isn’t optional—it’s essential. A well-prepared WIP report not only keeps your projects on track but also strengthens your company’s financial foundation.
Send me an email at bryce.wisan@levvigo.com and I'll be happy to send you an Excel template of a WIP report.