By Deepa Bhat, CPA, CFE, ACA, Assurance & Advisory Principal
ASL Construction Group
It’s been a while since we’ve had a deep dive article on work in progress (WIP) schedules (to refresh your memory, see Red Flags on a Contractor’s Work in Progress Schedule). As I review the WIP schedule for a new client, I find myself referring to this article for all the recommendations I’d like to make to this client. A few additional observations are noted below:
- One of the key elements of an accurate WIP schedule and contractor financials is the estimated costs on a project. In order to operate at a desirable profit margin, it is imperative that direct and overhead costs are accurately estimated and a reasonable margin is added on top of these estimated costs before bidding on a contract.
- The contractor should continue to assess the actual costs on projects and compare them to the estimated costs to ensure that the margins are not squeezed due to scope creep or job inefficiencies.
- If scope creeps are identified, proactive communication with the customer to negotiate a change order will go a long way in ensuring that the margins are not compromised.
- The contractor should also keep an eye on the underbillings balance to ensure that loss jobs and unapproved work are identified as early as possible and remedied through a change order request.
There’s always a lesson to be learned from loss jobs for future projects and hopefully the tips provided above are helpful to avoid such a situation. The ASL Construction Group is happy to assist you with any questions about your WIP schedule.