An accurate and timely Work in Progress (WIP) report is an essential tool for running a business.
A contractor will often create a WIP report out of an obligation to the bonding agent. Perhaps the bank requires one. When these contractors aren’t using that data to manage the business, they are throwing away money with every job.
A WIP report can be the difference between success and failure for a contractor’s business. It allows a savvy business owner or project manager to look into the future using forecasted projections.
Here’s how it works.
Importance of Accurate and Timely WIP Reporting
With a WIP report you can proactively manage work and profit using actual job data as opposed to being reactive. Rather than managing problems when you find them, you’re staying ahead of the game and optimizing profit with every job.
Accurate and timely WIP reporting starts with clear communication between accounting and project management. The project manager collects and uses real-time, accurate data from the field and the role of the accountant should be to question potential inconsistencies in the report.
With information from the project manager and guidance from the accountant, the company can make smarter decisions. They can deploy resources to maximize profits. This is the key to success in contracting.
WIP reports allow you to scale and grow your business. You can manage jobs accurately and create accurate financial statements that can be used to analyze your company’s stability and growth.
Understanding and Using WIP Reports
Not everyone will use a WIP report the same way as other contractors.
For example, consider the schedule for when a WIP report should be run. The frequency will be based on the specific parameters of your unique business. Keep in mind – the sooner you receive that information, the sooner you will have visibility of problems and can solve them.
There are also different ways to calculate WIP – units completed, percent completed, and cost to finish are the most common. There are advantages and disadvantages to each. Let’s look at each:
- WIP Report with Units Completed. Units completed, in conjunction with the percent of budget spent, is the most accurate method of costing. With his report, you’ll look at how much of the project is completed versus budget spent. It’s an excellent way of identifying problems early in a project. For example, if you’ve installed 50 out of 100 standard light fixtures (50% completed), but you’ve already spent 80% of the budget on the installation – you have a problem.
- WIP Report with Percent Completed. This method is often used when there isn’t a measurable unit for analyzing completion. Many times, this WIP report will be an educated guess from the PM on the work completed. That guess is better than an, “I don’t know,” and can still provide valuable insight. This will let you estimate the remaining project timeline and resources by calculating the units completed.
- WIP Report with Cost to Finish. In this report, you need to calculate the cost to finish by listing what has already been spent to date, and the amount of labor and materials costs that have yet to be paid for. Your total project cost would be the cost to date plus the cost to finish. This becomes your revised estimate from which you can calculate expected profit.
The WIP reports provide much better insight into a project than comparing estimated cost to actual cost. The truth is, no contractor ever completes a job exactly on budget.
Leverage Accurate Reporting to Improve your Business
Your goal should be to not only have a company-wide WIP report, but a WIP report for each job. The more detail you can include in your WIP reports, the better you can see which activities deliver the highest profits. You’ll be able to identify where you are losing money.
Realistically, businesses need to keep contractors and project managers on target, but also in budget. That is where a WIP report can help. With a process in place for collecting this data and generating reports, everyone knows the jobs that make money and the ones that lose money.
Real time, accurate job costing is like keeping score in a game. If the project manager knows the score, then they can make better decisions about the next play.
If you would like to learn more about job costing or WIP reports, please contact us at email@example.com.