WIP schedules: over-billing and under-billing explained

On any job that runs longer than a month, two numbers drift apart: what you have billed and what you have earned. The work-in-progress schedule — the WIP — is the report that measures the gap, job by job.

It is also the first thing a surety asks for, and very often the first thing a lender reads. Not because it is complicated, but because it answers the question every outsider has about a contractor: are the jobs on the books going to make what you said they would?

What goes on it

One row per open job. The columns:

• Contract value — the original contract plus approved change orders. Not pending ones.
• Estimated total cost — what the job will cost by the end, as best you know today.
• Cost to date — what has actually been spent so far, from the books.
• Percent complete — cost to date divided by estimated total cost. This is the cost-to-cost method, and it is the most common one.
• Earned revenue — percent complete times contract value.
• Billed to date — what you have invoiced on the job.
• Over or under billing — billed to date minus earned revenue.

That is all a WIP schedule is. The value is entirely in the last column, and in how honest the second one is.

A worked example

Three open jobs, at the end of a month:

Job A is half built and has been billed for 60% of its value. Job B is 80% built and billed for 70%. Job C is exactly where it should be.

Over-billing is not free money

Job A's $40,000 over-billing feels good — it is cash in the account. But it is cash for work you have not done yet. On the balance sheet it is a liability, usually labelled billings in excess of costs and estimated earnings, because you owe that work.

Over-billing becomes a problem when it is spent on something other than the job — last month's payroll on a different job, a truck, the owner's draw. Then the job still has to be finished, and the money that was supposed to finish it is gone. Plenty of contractors who went under were heavily over-billed right up to the end: the account had money in it until the moment it did not.

Modest over-billing on a job that is on budget is healthy. Large, growing over-billing across many jobs is a warning.

Under-billing is a question

Job B's $15,000 under-billing is an asset on the balance sheet — costs and estimated earnings in excess of billings — because you have done work you have not yet billed. There are two possible explanations, and they mean very different things.

You are behind on billing. The work is done and the invoice has not gone out. That is a cash problem, and fixable this week: bill it.

The estimate is wrong. Costs are running ahead of plan, so the cost-to-cost calculation says the job is further along than it really is. What looks like unbilled work is actually a cost overrun that has not been admitted yet.

This is why sureties and banks look hard at under-billings. They know the second explanation is common, and they will often discount under-billings when judging your working capital. If yours are the first kind, be ready to show it.

Fade: the number that tells the truth

The most important thing a WIP schedule shows over time is fade — the estimated gross profit on a job shrinking from month to month.

Suppose that next month, Job A's estimated total cost rises from $320,000 to $340,000. Estimated profit fades from $80,000 to $60,000. And because percent complete is now 160 divided by 340, about 47%, earned revenue drops to roughly $188,000 — so the over-billing grows to nearly $52,000 without a single new invoice.

A job that fades a little every month is a job whose estimate was optimistic from the start. A company whose jobs fade as a rule has an estimating problem, and the WIP schedule is where it becomes visible. Jobs can gain too, but consistent gain usually means estimates are being padded and work is being lost at the bid.

Everything depends on the cost to complete

The weak point of any WIP is the estimated total cost, because it depends on someone forecasting what is left. Project managers are often optimistic — no one likes to report that their job is going over. A WIP built on stale estimates is worse than none, because it looks authoritative.

Update estimates every month, job by job, from people who know the job. The books supply cost to date; the estimate to complete has to come from the field.

Who needs one

Any contractor whose jobs regularly run longer than a month, anyone bonded or seeking bonding, and anyone with a bank line that requires financial reporting. A service company whose jobs finish the same day does not need a WIP schedule — its receivables report does the same job.

How revenue is recognised for your tax return is a separate matter with its own methods and size thresholds, and it is your CPA's decision. The WIP schedule is a management and reporting tool, and it is useful whichever tax method you use.

Building one each month

1. Close the month first. Every cost for the month entered and coded to its job, and every account reconciled. A WIP built on an open month is fiction.
2. Update estimated total cost for every open job, from the field.
3. Calculate percent complete, earned revenue and over/under for each job.
4. Review the movers. Which jobs faded, which swung from over to under, and why.
5. Record the adjustment if you report on an accrual basis, so the financial statements match the schedule.

Related

• Getting bonded: what a surety looks at
• Deposits and progress billing
• Cash basis vs accrual for contractors
• Bookkeeping for general contractors

General information, not accounting or tax advice. Your CPA should confirm the revenue recognition method used in your financial statements and tax return.