A key KPI for construction accounting is Construction Work in Progress (WIP). WIP is the measure of the progress of a project which provides insights into the health of operations.
What is Construction WIP?
Work in Progress in construction refers to the accounting process that tracks the costs and billings associated with a construction project during its ongoing stages. It represents the value of the work completed but not yet invoiced to the client. This accounting technique is pivotal because it helps contractors understand the profitability and cash flow of their projects at any given time.
Why is WIP Important?
The significance of WIP in construction cannot be overstated. It serves as a financial snapshot, allowing contractors to monitor the progress of their projects against the budget and schedule. A well-maintained WIP report can highlight projects that are over or under-billed, providing an opportunity to address any discrepancies before they escalate into larger financial issues.
Components of a WIP Report
A comprehensive WIP report typically includes several key components:
Costs Incurred
This includes all costs related to labor, materials, subcontractors, and equipment up to the reporting date.
Billings to Date
The total amount billed to the client for the work completed.
Percentage of Completion
An estimate of how much of the project has been completed, which is used to determine the revenue recognized to date.
Gross Profit
The difference between the revenue recognized and the costs incurred.
Over/Under Billings
A comparison of the billings to date against the costs incurred and the estimated total cost of the project.
Benefits of WIP Reporting
Effective WIP reporting offers several advantages:
Financial Control
It provides a clear view of where a project stands financially, helping to manage cash flow and profitability.
Risk Management
Early detection of potential issues allows for timely corrective actions, reducing financial risks.
Operational Efficiency
By understanding the financial status of projects, companies can make informed decisions about resource allocation and project prioritization.
Compliance
Accurate WIP reporting is essential for financial statements and can be critical for compliance with industry regulations and standards.
Challenges in WIP Reporting
Despite its importance, WIP reporting can be challenging. It requires accurate and timely data collection, and the methodology for calculating the percentage of completion can be complex.
Additionally, it demands consistent communication between the accounting department and project managers to ensure that all relevant information is captured and reported correctly.
Anterra Automated WIP for the Win!
Construction WIP is a vital aspect of construction management and accounting. It provides transparency into the financial progress of projects and is essential for maintaining the fiscal health of a construction business. With the right tools and processes in place, WIP reporting can be a powerful instrument for guiding a construction company to successful project completions and long-term profitability.
Anterra’s Automated WIP Management and WIP Reporting solution empowers construction firms with a robust platform to enhance revenue recognition accuracy.
Whether you use Sage 300 CRE, Acumatica, or Vista by Viewpoint — you can bridge the gap between Operations and Finance with Anterra.
WIP Reporting includes earned revenue, adjusted gross profit, WIP profit, job-to-date billings, cost in excess, and billing in excess. Click below to request a one-on-one demo for your company!