WIP or Get Whipped: Turning a Report into Contractor Success

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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 info@computerease.com.

What is Job Costing for Contractors and Construction Companies?

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The success or failure of any construction job is based on profit.

Profit margins are razor-thin in construction. Job costing helps you project job expenses to identify problems before they impact profit. Can work be completed with the money and budget available? What are the risk factors on the job? What do you need to do to be successful?

Job costing is the key to managing a construction budget and identifying if a job will be profitable. It simplifies the complexity of managing a contracting job. It gives you the power to focus on the work with the highest reward.

Job Costing and Construction Accounting

Precision and accuracy are required in construction.

You need to build with the right materials. You need to accurately follow blueprints. You need precision with every cut and measurement.

Job costing brings accuracy and precision to your construction accounting.

With job costing, you can accurately predict, record, and control the cost of each job. Your materials, labor, subcontractors, and equipment expenses are tracked and monitored during the job. You can see where the money is going as work is completed. You can more accurately predict future costs and build a precise record of expenses.

That record is data you can use. It’s the data you need to manage, and grow, the business.

The Benefits of Job Costing

Accurate job costing gives contractors the ability to grow the business. Here’s how it works:

  • Estimate jobs accurately and quickly: Without job costing, estimates are a best guess. With other bidders competing for the same work, many contractors end up underbidding. Without quick and easy access to historical records, mistakes are made that end up hurting the job and business. Job costing puts the data at your fingertips, so you can estimate jobs accurately and quickly.
  • Manage profit for every job: Job costing gives you control of the money you make for every job. You see how much a job is costing. There’s no more stress, worry, or guesswork in managing a job, because expenses are broken down accurately. You can see how you need to manage work to maximize profit.
  • Work better with customers and vendors: Over estimating and under estimating can lead to project delays, lost profit, and broken budgets. This causes stress between you, your customers, and vendors. Job costing eliminates that stress. You can better collaborate and deliver more value to customers. That means future work and business for your company.

Job Costing and your Growing Business

For many contractors and construction companies ready to take control of their business, job costing through construction accounting software is the key. It’s the tool that helps them leverage their ambition with the practical needs of the business.

To make money in construction, you need to stay on top of cost and expenses. That’s what job costing will do for you. You can accurately run labor analysis and measure productivity. It lets you select the most profitable jobs and find profit even when problems happen. It gives you the power to take control of your business.

For companies ready to stop losing money or breaking even with every project, job costing gives them control. It replaces guesswork with accuracy and precision for every job.

Have questions? Contact us at info@computerease.com.

ComputerEase Software Approved as CPE Sponsor by NASBA

CPE CertificateComputerEase announced today that it has been approved as an official sponsor on the National Association of State Boards of Accountancy’s (NASBA) National Registry of CPE Sponsors.

This new sponsorship approval means that ComputerEase will be able to offer Continuing Professional Education (CPE) Credits to attendees at their regular Educational Webinars, particularly those aimed at Construction CPAs.

“We’ve always focused very heavily on education in the construction accounting field,” says ComputerEase President John Meibers. “It’s such a unique niche in the accounting industry, and this is the latest step toward making it easier for those involved.”

The NASBA has stringent standards on the companies that can be listed on their Registry. The process lasted for several weeks and included an audit of one of the classes to be offered. Meeting these standards means that ComputerEase is prepared to offer construction-focused CPAs the highest quality of continuing education credits, ensuring that their trade knowledge remains relevant.

“Our CPA Partners have often requested CPE credits as a benefit to the program,” Meibers continued, referring to ComputerEase’s free partnership program that provides CPAs with a free copy of ComputerEase Software to help them coordinate with clients and ensure that they’re on the same page. “With this additional value, we feel confident that even more CPAs will join our growing network.”

Meibers noted that CPA Partners will have access to the ComputerEase customer portal, where video recordings of each webinar will be archived and available for re-watching.

Click here to learn more about the ComputerEase CPA Partner Program.

Reporting in from the AICPA Conference

IMG_0206We’re on the ground in Las Vegas, where ComputerEase is the Gold Sponsor of AICPA’s annual Construction and Real Estate Conference. We take our CPA Partnerships very seriously, as they may be the single best avenue we have for making our clients’ work easier. If you’re a CPA with clients who use ComputerEase and are at AICPA, be sure to stop by our booth!

Otherwise, make sure you check out our CPA Program for yourself on our website!

The conference has been terrific so far; we’re building valuable partnerships that will benefit countless contractors!

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Year-End Tax Planning for Business

While the fate of several business-related tax extenders such as Research & Development tax credits, bonus depreciation, and Section 179 expensing that expired at the end of 2014 is uncertain, there are still a number of end of year tax planning strategies businesses can use to reduce their tax burden for 2015.

Deferring Income
Businesses using the cash method of accounting can defer income into 2016 by delaying end-of-year invoices so payment is not received until 2016. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2016.

Section 179 Expensing.
Business should still take advantage of Section 179 expensing this year for a couple of reasons.  In 2015 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $25,000 for the first $200,000 of property placed in service by December 31, 2015. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. In addition, unless Congress reauthorizes it, the bonus depreciation expired at the end of 2014 and is not available for 2015.

While most businesses follow a calendar year, for those that don’t there is an exception to the $25,000 cap that allows those businesses to take advantage of the $500,000 Section 179 benefit. However, only businesses whose calendar year begins in 2014 and ends in 2015 can take advantage of this.

Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Note-blue-stickyNote: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

 

Small Business Health Care Tax Credit.
Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $51,600 in 2015) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).

Business Energy Investment Tax Credit.
Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016, and businesses that want to take advantage of these tax credits can still do so.

Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.

Repair Regulations.
Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.

Section 199 Deduction.
Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2015, businesses can increase the amount of this deduction.

Small Business Investment Company Program

There are a variety of alternatives to bank financing for small businesses, especially business start-ups. The Small Business Investment Company Program fills the gap between the availability of venture capital and the needs of small businesses that are either starting or growing. Licensed and regulated by the SBA, SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. They use their own funds plus funds obtained at favorable rates with SBA guaranties and/or by selling their preferred stock to the SBA.

SBICs are for-profit firms whose incentive is to share in the success of a small business. Laptop on Desk office and Graph analysis spreadsheet, Business financeIn addition to equity capital and long-term loans, SBICs provide debt-equity investments and management assistance.

The SBIC Program provides funding to all types of manufacturing and service industries. Some investment companies specialize in certain fields, while others seek out small businesses with new products or services because of the strong growth potential. Most, however, consider a wide variety of investment opportunities.

Surety Bond Programs
By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $100,000 or more. Many state, county, city and private-sector projects require bonding as well. The SBA can guarantee bid, performance and payment bonds for contracts up to $1.25 million for small businesses that cannot obtain bonds through regular commercial channels.

Bonds may be obtained in two ways:
Prior Approval. Contractors apply through a surety bonding agent. The guaranty goes to the surety.

Preferred Sureties. Preferred sureties are authorized by the SBA to issue, monitor and service bonds without prior SBA approval.

The SBA has offices located throughout the United States. For the one nearest you, look under “U.S. Government” in your telephone directory, or call the SBA Answer Desk at (800) 827-5722. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640.

How Can I Avoid Running Into Cash Flow Problems in My Small Business?

A wise business owner once said, “Happiness is a positive cash flow.” As a business owner, I’m sure you agree. Everything is better when your cash-in exceeds your cash-out. A cash crisis can be emotionally devastating and it can even kill your business. If you’ve ever had to beg, borrow and steal to cover tomorrows payroll you know what I mean.

Failure to properly plan cash flow is one of the leading causes for small business failures.Cash Flow Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable – credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

Using ComputerEase tools such as the WIP Report and the Cash Center creates a real time picture of your cash flow. But did you also know that you can create a What-If Scenario within the Cash Center? Using this feature gives you the flexibility to predict your cash flow based on the fields of your choice.  If you have any questions on this or any of the other features provided by ComputerEase, please contact us by Clicking Here.

Business Strategies

Financing

One key to successful business expansion is your ability to obtain and secure appropriate financing. But as many quickly discover, raising capital may not be easy; in fact, it can be a complex and frustrating process.

However, if you are informed and have planned effectively, raising money for your business will not be a painful experience. Professional guidance should be considered in this quest, especially as to the financial information for the loan proposal.

 Finding Sources of Money

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. These include:

Banks and Credit Unions. The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.

Venture Capital Firms. These firms help expanding companies grow in exchange for equity or partial ownership.

Borrowing Money

Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: “High Risk!” To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

Terms of loans may vary from lender to lender, but there are two basic types of loans: short-term and long-term.

A short-term loan generally has a maturity date of one year. These include working-capital loans, accounts-receivable loans and lines of credit.

Long-term loans generally mature between one and seven years. Real estate and equipment loans are also considered long-term loans, but may have a maturity date of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

WIP or Get Whipped

Why accurate, timely Work In Progress reporting is essential to contractors

By John Meibers, President of ComputerEase Software

Too many times a contractor creates a Work in Progress – (WIP) report because he feels he is obligated to do so, as the bonding agent or the bank requires it.  However, an accurate and timely WIP report should be seen as one of the essential tools for running a business.  A WIP report is a key component of enabling you to look into the future through forecasted projections.  So why are forecasted projections important? They enable you to be proactive with job data as opposed to reactive.  For Example, armed with the information that I have a job that is 50% completed at a cost of 75% of the budget, I still have time to make adjustments in an effort to reduce some of my potential cost overrun.

Reports ImageHow is an accurate and timely WIP report accomplished?  A successful company starts with clear communication between their accounting and project managers. The role of the accountant is to question potential inconsistencies in the report, whereas the project manager needs real-time, accurate data from the field. With that information, the company can make smarter decisions in deploying their resources in order to maximizing their profits. Ultimately if a company is not making money, everything else becomes irrelevant.

The importance of WIP reports in analyzing your business cannot be emphasized enough. Too often I have observed business owners utilizing a CPA as a bookkeeper, entering numbers and producing reports, instead of acting upon the numbers.  Conversely, companies that gather solid WIP reports add value by maximizing their CPA’s expertise as a business consultant as they strive to grow their bottom-line profits. WIP reports not only enable you to manage your jobs accurately, they are a key component in creating an accurate financial statement, which is required when analyzing of your company’s stability and growth.

I am often asked the question: “How often should I run a WIP Report”?  Some people only run a WIP report when they need too, others will run the report monthly or even weekly.    The frequency of your WIP reporting will be based on the specific parameters of your unique business. The bottom-line: the sooner you receive that information the sooner you will have visibility of the projected problems. Only then will you have an opportunity to fix the problems.

Another question I am often asked is: “How do I go about calculating a WIP report”? There are a number of methods one can use to calculate WIP. The three most common used methods are Units Completed, Percent Completed, and Cost to Finish.

In my years of experience working with project managers in construction companies I have learned that units completed in conjunction with the percent of budget spent, is the most accurate method of costing. For example, I have 100 standard light fixtures to install; I have installed 50 of them, therefore the task is 50% completed. Everything sounds good so far. However, if I have spent 80% of the budget on the installation of those 50 light fixtures then, “Houston, we have a problem”. This clearly demonstrates why analyzing only the estimated costs as opposed to the actual costs can prevent a company from seeing that a particular job is losing money.

The second method utilized to calculate WIP is the percent completed; it is used when I don’t have a measurable unit.  For example, perhaps I am doing the electrical work in a facility. As the PM, I walk the project with my superintendent so that I can give an estimate of the completion. A “units completed” would be more accurate, but the “my educated guess says we are 50% done” method is still going to be better than saying “I don’t know”. One of the worst assumptions that can be made is estimating the completion of a job based on how much money I have spent thus far.

Another very good method to calculate your WIP is Cost to Finish.  I ask my project manager: “What do I need to finish this task”? I already know how much we have spent to date. But to finish the task I am going to need 10 men for the next two weeks and I have $5,000 in miscellaneous materials that have yet to be ordered. With this information I can then calculate a cost to finish. The equation would be my cost to date plus my cost to finish which then becomes my revised estimate.

Any of these three methods work and all of them are better than just comparing the estimated cost to the actual cost. If you look at a $100,000 budgeted job and you can see that $50,000 has been spent thus far, the absolute worst assumption you can make would be that 50% of the job is completed. The odds are against you that you will spend exactly $100,000 on that specific job. The reality of contractors completing a job for exactly within budget, just never happens.

The question that then follows is: “Just how detailed do I need to be in my WIP report”? I will certainly want a companywide overview WIP report, but I will also want a job-by-job WIP report, and within the job I want to see the details of the specified activities or tasks. This in turn leads to the question: “How detailed do I need to be on tracking activities or tasks?” (the costs of which will feed into the WIP report).  Some companies track one task, others up to 100, and yet others track more than 100 tasks to complete a job. Optimally you need as many details as possible. You may have 100 task codes, but if it’s not probable that your field staff will ever break down the costs to the 100 activities, there is no point in having 100 activities. The result will be some activities that are way over budget and others that are way under budget because no-one is allocating their costs properly. There is certainly a fine line between “ I would like to have a lot of detail” and  “what is a realistic outcome when I gather the data in the field?”.

Contractors often start out as a smaller business with the owner walking around knowing everything about every job and its progress. He has his finger on the pulse of the business. However, the larger the company grows, the more visibility tends to become obscured. No one wants to do twice as much work to make the same amount of money. When a process is put in place, everyone knows the jobs that make money and the ones that lose money. Real time, accurate job costing is similar to keeping score in a game. If the PM knows the score then he/she can make better decisions about the next play.

Real-Time Labor Costs Improve Your Bottom Line

Real Time ReportingAny contractor knows that successful project management hinges on labor. That’s not to say that smart material purchases and inventory control don’t also play a role in job profitability. However, unproductive labor will always kill profit, which is why knowing your real-time labor costs can improve your bottom line.

Traditionally, labor costs have been notoriously difficult to track because of the time lapse between what was happening in the field versus what your office records reflected. It wasn’t that long ago when, if a project manager wanted to know the job progress, he had to look at the last payroll processed – which could be a week old or more. While this was good information for the time, it certainly wasn’t accurate.

Thankfully, technology has revolutionized how contractors manage labor – and the overall job. Today, project managers can get real-time labor costs that tie into their construction accounting software, like ComputerEase.

In the construction industry – where customer expectations are high, profit margins are slim and the pace is faster than ever – you need labor costs on a daily basis to make informed decisions. Today, you don’t have to wait until the paperwork is turned in; you have technology to help you.

Field-to-OfficeTimesheets, daily logs, change orders and job costs can all be captured from the field so you know what’s happening at all times. Mobile devices with internet access can transmit data from the field directly to your accounting system in the home office, eliminating the double-entry problem.

When a real-time field-to-office solution is set up, you can manage a job from anywhere. Imagine a workplace where your crew is out in the field during the day, and by night you know who worked on what job, what tasks they performed and even what equipment was used. It really is that simple when you have the right system in place.

Learn more about our real-time solution, FieldEase.