Taming Uncertainty With Your WIP

A contractor’s work-in-progress (WIP) schedule can be a window into current and projected job profitability, project cash flow, and backlog. The WIP provides a pulse of each project and a 360-degree view of the historical, current, and future states. And because of these characteristics, it’s imperative to maintain realistic, up-to-date information within the WIP.

This article covers the historical, current, and future job states; how they are important to WIP analysis; and how consistent communication about the WIP is valuable to your company.  

Job States & WIP

Historical and current job data can paint a clear picture of where a company thrives or struggles, which can be used to narrow the lens. The future state offers a thorough examination of underbilling and variations between estimated and actual expenses.

Historical & Current States

The historical state illustrates the actual job-to-date performance of the project, while the current state focuses on real-time insight into job profitability. Both views create transparency that allow management to adjust to identify opportunities to gather as much revenue as possible (as a result of timely change orders) and maintain profit or manage fade before it’s too late.

Depending on the type of project, you may have a short window of time to identify and mitigate issues with minimal cost and time lost.

Subindustry Classification

If projects can be categorized into specific subindustries (e.g., residential, commercial, industrial, governmental, private sector), management can break down the WIP schedule and further analyze profitability by subindustry.

This could help contractors visualize focus areas and highlight potential growth opportunities if resources were shifted to more profitable areas. Doing this illustrates a build what you know strategy, which is particularly helpful in uncertain economic times and when skilled labor is difficult to find.

Future State

The future state provides a deep dive that helps identify underbilling trends and changes in actual vs. estimated costs to improve the outcome of the project. This state can also help facilitate backlog management.

In times of economic uncertainty, it’s important to focus on not only the current backlog, but also the status of potential jobs in the pipeline. It’s essential to consistently stay abreast of how many jobs could potentially be canceled and how many will be carried out. For those that will stay on the books, any changes to project start dates and duration should be noted.

For example, a project that was planned to start in the current year may be delayed two years to allow for market recovery or stabilization. This project still belongs in backlog but should be excluded from any short-term budgeting. Budgeting in a recessionary environment also may include reserving a portion of the backlog with the potential of jobs to be put on hold or canceled.  

During this uncertainty, an evaluation can also help manage profit margin by taking a pre-emptive approach to the changing norms. Having a solid gauge on workload enables a proactive scheduling approach to combat the ongoing labor shortage and supply chain challenges.

The current labor climate places many constraints on job profitability. Contractors may not have sufficient in-house resources to complete their workload on time and may be forced to pay overtime or hire subcontractors to complete the work at an even higher cost.

Supply chain bottlenecks can also cause timeline delays, potentially triggering liquidated damages. Extra consideration may be required related to the procurement process to help avoid preventable charges. Thoughtful, long-term scheduling can help avoid these circumstances and begins with having a good grasp on workload.

How to Avoid Common Pitfalls

To help WIP reach its full potential and increase the return, here are some ways to avoid common pitfalls.  

Track Committed Costs

It’s key to understand and monitor the commitment of costs through subcontracts and purchase orders. These items are often lumped into total estimated costs and then the detail disappears. Itemizing and then tracking what has been committed against the budget helps determine project costs left to complete and monitor potential overruns.

Don’t Rely on Overbillings as a Profit

Educating operations to understand there is a balance to overbillings (i.e., the cash flow to be used to fund the remaining work) can be a hurdle. Although it’s the preferred cash flow position, project managers should not rely on an overbilling to profit the project, as this can lead to bankrupting the project.

Significant overbilling, especially on longer projects, can lead to job-borrow; this happens when a contractor mistakenly assumes that cash sitting in the bank is profit and uses it on something else, unintentionally driving future cash flow problems.

For example, if management obtains significant funds due to early overbilling and subsequently spends it faster than anticipated, then cash flow could dry up on that project if additional billings are not accepted by the owner.

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About the Authors

Jamie Tancos

Jamie Tancos, CPA, is Senior Managing Consultant at FORVIS (forvis.com) in Indianapolis, IN.

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Kirk Neibuhr

Kirk Neibuhr, CPA, is a Senior Manager at FORVIS (forvis.com) in Indianapolis, IN. Kirk provides assurance, accounting, and financial consulting services to companies in the manufacturing, distribution, and construction industries.

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