It is a well-known fact that best in class contractors prepare a work in progress (WIP) schedule on a regular basis. Not only does this practice allow the users of the financials, such as lenders and bonding companies, identify early warning signs, it enables contractors to better measure their progress on jobs and be proactive in seeking change orders and contract revisions. As a constant reviewer of contractor financials, I have found the following most common red flags on WIP schedules that are worth mentioning:
- Jobs that are over 100% complete – Giving more than 100% effort to something sounds great theoretically, it is however, plagued with practical problems when seen on a WIP schedule. Jobs more than 100% complete are indicative of the inability to properly estimate total contract costs or failing to update estimated costs when actual costs incurred have exceeded the original estimate. Besides eating into the contractor’s previously healthy estimated margins, it can lead to a significant reversal of profits due to poor estimation.
- Large underbillings or net underbillings on the WIP schedule – While this asset account represents money which will be recouped by the contractor as the contract progresses to completion, it could represent unapproved amounts (change orders or claims) that are included in contract amount or suggest an overly aggressive profit estimate. Always ensure that underbillings reflect total estimated costs that are accurate and expected to be collected.
- Overbillings supported by little to no cash on the contractor’s balance sheet – overbillings are necessary to maximize cash flows in the business, assuming that such billings are collected by the contractor and used for business purposes. Indiscriminate spending of cash collected on overbillings can cause an unwanted financial burden on the contractor who still has the obligation to perform the work that’s already been paid for by the customer.
- Loss jobs – in most cases, loss jobs are the result of poor or inaccurate estimates, working on jobs outside the usual geographical area or lack of monitoring delays and avoidable errors. While some circumstances can be outside of the contractor’s control, frequent and significant loss jobs can result in a loss of confidence by lenders and bonding companies.
Hopefully, these insights into common issues with a WIP schedule will prompt investigation in the initial stages before they snowball into significant profit fades for the contractor. If you have any additional questions, please contact our Construction Group.