An accurate work-in-progress (WIP) report is essential for contractors, regardless of company size. It provides a clear picture of your project’s progress and financial performance including profitability, cost-to-complete, contract value, and expenditures.
This article looks at important ways a WIP report helps construction companies manage finances and shows how financial automation can have a game-changing effect.
The Essence of WIP
The WIP not only documents a project’s financial status, but it is also a tool for internal and external parties to evaluate a company or project’s financial health; however, many companies don’t use this key report to its fullest potential. While some may regard it as merely a compliance document, it’s an essential tool for businesses.
WIP Helps Prevent Over/Underbilling
The WIP is the primary way to monitor whether a job is over or underbilled. If your project is 60% complete but only 40% billed, then you’re underbilling. And if a project is underbilling, then you’re losing cash.
If expenditures like material, labor, subcontractors, or equipment costs aren’t matching the project’s billings, then the project is in trouble. While most contractors have a habit of paying first and collecting later, it still makes underbilling a far too common risk.
However, overbilling isn’t necessarily better. Since there is a contract liability, your company may face negative cash flow as it catches up to what has been billed.
To avoid either of these outcomes, construction companies should rely on their WIP to inform their decision-making. These reports are crucial to staying on top of projects and ensuring a company’s overall health.
A WIP is the only way of seeing when a project is in dire need of reserves. If the project is struggling and the company is going to see losses, then the WIP is used to forecast the future to understand the potential damage to the entire company. It’s also the means of determining where there are reserves that can be drawn on to cover the projects that are financially failing.
An Essential Financial Communication Tool
Gross revenue and profits to date are all important financial metrics. That said, these don’t tell the full story of how your business is doing. It’s not your working capital that determines the health of your business; performance across multiple projects and how that pertains to available resources reveals your financial stability. A WIP allows you to tap into that information and consolidate it for external review.
Externally, the WIP may be used in some contracts to ensure compliance. It shows that the contractor is following the contract specs and can ultimately be evidence that the contract was adhered to, should it be required. This becomes especially important as change orders arise through the natural course of the project. A clear WIP shows your business’s commitment to the project and indisputable costs that may need to be addressed with an owner.
Additionally, a WIP may also be used by lending institutions to determine the viability of the project and its financial wellbeing. In short, a WIP gives your company the power to communicate the financial state of your projects without the need for excess documentation or an external auditor.
A Safeguard for Your Profits
Construction margins are slim and, with such tight profitability (even on multimillion-dollar jobs), it’s easy to see how just one or two losses could affect the entire company. Moreso, unpredictable factors such as supply chain issues, labor availability, and market fluctuations can destabilize the profit of projects that were previously considered guaranteed wins. It’s more important than ever for contractors to take proactive measures to protect their profits.
The WIP is the safeguard against such a disaster, providing a signal for when a construction company needs to pivot the business to make up for losses in one project. With proper analysis, it can help the organization see where the problem areas are and discover what’s causing the project to bleed cash.
The WIP won’t prescribe the steps to take, but it will diagnose the symptoms and factors causing the project and the company to lose money. Half the battle is knowing where your cash flow is going, and an accurate WIP allows you to mitigate risk long before it can cause problems and lean into profitability whenever possible.
The TV Dinner of Tracking WIP
While using a spreadsheet to create your WIP report is a functional solution, it’s not the most optimal one. Spreadsheets create several, notorious challenges for construction companies and for a WIP.
Opportunities for Error
A WIP includes a lot of detailed information wherein lies the possibility for human error. The wrong information goes in and before you know it, accidentally inputting “00s” instead of a proper code or amount causes the spreadsheet to break. The error will eventually be found, but someone must go in and find out why the spreadsheet numbers do not add up.
This type of spreadsheet corruption happens as it travels through responsible parties, and each person adds one more possibility of a mistake. The more people involved, the more chances of some broken formula or mistaken input.
Studies1 show that nearly nine out of every 10 spreadsheets (88%) have errors,2 and the majority of those are from human error. Even the most masterfully crafted ones have errors in 1% of the formulas.3 With profit margins averaging 6%,4 and depending on the contractor’s niche, every percentage of profit that a company doesn’t predict can create serious consequences down the line.
The easier your WIP is to review and the more graphical elements it has — performance curves, visualizations, multiple colors, and schemes for information — the less cumbersome it is.
Easy-to-follow reports have always been beneficial, but it is even more important with the incoming generation of workers who are typically more data-savvy and dashboard-oriented. A good-looking, effective WIP quickly gives those who need it a better understanding of how a project is doing and, ultimately, where the company stands.
Traditional spreadsheet WIP reports depend on a wide circle of contributors and approvers who push them forward to meet deadlines. The controller has the information, but project executives must give the final sign-off. After all, the project executives or managers have a boots-on-the-ground view of everything happening and are aware if anything needs to be put into the WIP to show risk exposure.
This process is vital, and it’s important that the project executives act as the gatekeepers of the project. They are ultimately accountable for the project’s success or failure. This takes time, and inputting to the WIP takes time away from project management, which can lead to delays in getting approvals in a timely fashion.
The best project managers (PMs) want to spend more time managing the project than they do working in a spreadsheet. An inefficient spreadsheet WIP system can hurt the retention and productivity of some of your best specialists.