Construction5 min read
What a WIP schedule tells your surety that your P&L can’t
Your income statement says whether the company made money. A work-in-progress schedule says whether each job is on track, and whether the cash is where the P&L says it is.
T. Wayne Meredith · Financial Management
Most subcontractors we meet can tell you last year’s revenue to the dollar. Far fewer can tell you, for each open job, how much of the contract they have earned, how much they have billed, and the difference between the two. That difference is where cash problems hide, and it is the first thing a bonding agent looks for.
The document that answers it is the work-in-progress schedule, usually shortened to the WIP schedule. It is one table, updated every month, with one row per open contract.
The columns
A WIP schedule does not need to be elaborate. The version your surety wants has these columns, in roughly this order:
- Contract value. The original contract plus approved change orders. Pending change orders stay out until they are signed.
- Estimated total cost. What you now expect the whole job to cost, not what you bid. This number moves, and it should.
- Cost to date. Everything posted to the job through month end: labour, materials, subcontractors, equipment.
- Percent complete. Cost to date divided by estimated total cost. This is the cost-to-cost method, the one most contractors use.
- Earned revenue. Contract value times percent complete.
- Billed to date. Everything you have invoiced on the job, including retainage held back.
- Over or under billing. Billed to date minus earned revenue.
Here is how that looks for two jobs. The figures are illustrative.
| Job | Contract value | Est. total cost | Cost to date | % complete | Earned revenue | Billed to date | Over / (under) |
|---|---|---|---|---|---|---|---|
| Job A | $1,200,000 | $960,000 | $480,000 | 50% | $600,000 | $690,000 | $90,000 |
| Job B | $800,000 | $680,000 | $510,000 | 75% | $600,000 | $520,000 | ($80,000) |
Both jobs have earned the same revenue. They are in very different positions.
Over-billing is a liability, not a windfall
Job A has billed $90,000 more than it has earned. The cash is in your account, but the work behind it has not been done yet. On a properly prepared balance sheet that $90,000 sits as a current liability, usually called billings in excess of costs and estimated earnings.
Over-billing is normal early in a job, when mobilisation and materials are front-loaded into the schedule of values. It becomes a problem when the business starts spending it. If Job A’s $90,000 paid for payroll on another job, the company will have to finish Job A’s remaining work without the cash to do it.
Under-billing is where cash trouble hides
Job B has done $80,000 more work than it has billed. That is an asset on the balance sheet, costs and estimated earnings in excess of billings, and on paper it is revenue you have earned.
Sureties treat large or growing under-billings with suspicion, and for good reason. Under-billing has three common causes, and only one of them is harmless:
- Timing. The pay application went out a few days after month end. This clears next month.
- Unapproved changes. You have done work the general contractor has not agreed to pay for yet. This may clear, or it may turn into a dispute.
- A cost overrun that has not been admitted. If the estimated total cost is too low, percent complete is overstated and so is earned revenue. The “under-billing” is really a loss that has not been recognised.
The third cause is the dangerous one. A job that is quietly running over budget looks, on the P&L, like a job that is simply behind on billing. The WIP schedule is the only place where the two can be told apart, because it forces someone to restate the estimated total cost every month.
Why the P&L cannot show this
An income statement is a company-wide summary for a period. It adds every job together, and it has no column for “earned but not billed” or “billed but not earned”. A company can post a healthy gross margin for the quarter while one large job loses money and another is carrying a large over-billing that the business has already spent.
That is why the surety asks for the WIP schedule alongside, not instead of, your statements. Bonding capacity is set on your balance sheet and your working capital, and over and under billings flow straight into both.
The one table a bonding agent wants monthly
When a bonding agent or surety underwriter asks for your WIP, what they are checking is fairly consistent:
- that the schedule ties to the general ledger: total earned revenue on the WIP equals contract revenue on the P&L, and the net over or under billing equals the balances on the balance sheet;
- that estimated total costs have been revised, not left at the original bid;
- that gross profit on each job is not fading month after month;
- that under-billings are small, explained and clearing.
A schedule that is produced once a year, at renewal, answers none of those questions well. A schedule produced every month, from books that are closed every month, answers them before they are asked.
What it takes to keep one
The WIP schedule is only as good as the job costing underneath it. Costs have to be coded to the right job as they are posted, change orders have to be tracked from pending to approved, and someone has to sit down with the project manager each month and restate the cost to complete. None of that is difficult. It is simply easy to skip when the month gets busy.
At MTL Services, the Job costing / WIP schedule (construction) add-on covers that monthly routine: job cost review, the WIP schedule tied to the ledger at month end, and the over and under billing entries posted before your package goes out. It is $750/mo and adds 4 hours to your band’s included hours, so the time it takes shows on your usage statement like everything else.
If you are not sure your job costs are coded well enough to support a WIP schedule, ask in a free consult (30 minutes). If the answer is "not yet", the Financial Health Diagnostic looks at exactly that in 10 business days.
