Construction work in progress: What’s the difference between accounting vs contract WIP

 

 

 

 

For those in building and construction, an accurate and real-time Work in Progress (WIP) report keeps building projects and jobs running efficiently and on budget.

But the real power of your WIP goes beyond the day-to-day running smoothly and can be a great business asset for understanding and monitoring your business performance as well as to grow your profit.

As well as giving you accounting and financial insights, your WIP can provide key information about your contracts and contractual obligations

In this article we’ll go into the benefits of work in progress reports and how to calculate accounting and contract WIP reporting for your building and construction business.

What is work in progress reporting?

Work in process (WIP) reporting is a great tool to better manage costs, understand cash flow forecasting, and ensure taxation compliance. It can also help you:

• Better understand and monitor your overall performance and profitability
• Accurately track project-related revenue and costs
• Identify and manage under and over billing
• Keep a handle on project spending and budgets
• Provide key insights to make informed business decisions
• Reduce the risk of billing disputes and contractual obligation compliance
• Reduce and proactively manage project-related and business risks

As a business advisor for building and construction, we recommend you record and monitor your accounting WIP each month and for each project. This will give you accurate profit progress for each project currently underway and help you identify any issues early.

Your WIP should use real-time data and include a number of details, including percentage of process, under and over billings, and earned revenue totals.

READ MORE: Learn 7 KPIs every tradie and builder should know

What’s the difference between accounting and contract WIP reporting?

There are two types of WIP reporting building and construction business’ can leverage: Accounting WIP reporting and Contract WIP reporting.

Accounting WIP reporting

WIP reporting for accounting purposes focuses on the percentage of project completion and is used for reporting related to revenues, expenses and taxation obligations.

This form of reporting gives you insights into:

• Your overall performance and profitability
• Short and long term financial trends
• Cash flow management and forecasts
• Under and over billing trends
• Project budget management
• Business risks and opportunities

Contract WIP reporting

While accounting WIP measures your profits as you progress through your project, contract WIP reporting calculates your liabilities during your contract period.

Contract WIP reporting refers to monitoring and tracking your contract liabilities and deferred income, such as what you have invoiced or received payment for but are yet to complete. For example, if you have a $500,000 project you haven’t started, you have a $500,000 liability you need to deliver.

This form of reporting is essential in building and construction, especially as projects are managed by contractual agreements and payment schedules.

Contract WIP reporting can help you:

• Understand your total contract liabilities
• Better manage contract related risks
• Protects your rights and enforce contract terms
• Track work owing and contractual obligations yet to be completed

As business advisors for the building and construction industry, we use both accounting and contract WIP reporting to help our clients get the insights they need for their business.

Accounting vs Contract work in progress reporting: How are they calculated?

Calculating accounting WIP for your building project

Accounting WIP calculates your profit over time, and is determined first determining the percentage of work completed followed by the total earned revenue and total over and under billed revenue.

Step 1: Identify the projects you’d like to calculate WIP for

Step 2: Determine the total cost for the project (including direct labour costs)

Here it’s important to not only calculate direct costs but also wages, unallocated invoices, and any project overruns.

Step 3: Calculate the percentage of completion

Actual Costs / Revised Estimated Costs = Percentage of Project Completion

Step 4: Calculate the WIP

Percentage of Work Completed / Total Estimate Project = Project Earned Revenue

Total Invoiced – Total Costs – Project Earned Revenue = WIP or billed amount

Here, your WIP can be negative or positive depending on the stage of the project, with a negative WIP occurring where the project invoicing is ahead of costs incurred and a positive WIP the opposite.

READ MORE: Learn more about how to calculate WIP here and download our free calculator

Calculating contract WIP for your building project

As contract WIP is reporting on liabilities related to your project, it’s essential to understand not only how much has been invoiced but also what has been delivered so far for each project.

Step 1: Define the total costs for each project (including direct labour costs)

You’ll need to define both the actual and budgeted costs for each project. This will also help you understand your percentage of completion.

Here it’s important to not only calculate direct costs but also wages, unallocated invoices, and any project overruns.

Step 2: Identify the total contract value

This should be the value for the contract over the life of the contract.

Stage 3: Define project invoiced revenue

Here, it’s important to take into consideration all invoices and deposits paid by the project customer.

Stage 4: Calculate contract WIP

(Actual cost / budget costs) x Contract Value – Project Invoiced Revenue = Contract WIP

Common WIP reporting mistakes to avoid

While WIP reporting can provide your building and construction business with a lot of business and project insights, if completed incorrectly you could be making decisions based on inaccurate financial data.

To ensure your WIP reporting is as accurate as possible, here are some common WIP reporting mistakes to avoid.

• Inconsistently completing WIP reporting>
• Incomplete or inaccurate data being entered
• Lack of detailed project notes
• Using overbilling as profit
• Not linking your WIP to your profit and loss statement
• Delaying the tracking of project expenses and costs
• Not taking into account the contract liabilities and what is owing to the customer

Here, automating your reporting processes and data entry is key. Leveraging construction accounting software, working with your accountant or business advisor can also help you streamline the process.

If you’re unsure if your WIP is accurate or what information to include, you can chat to a building and construction accountant such as Mead Partners to manage, monitor and report your WIP for you.