In the past, contractors relied on paper and a variety of methods to manage their accounting needs. The problem was the time and effort it took to consolidate the data and generate reports.
Now contractors have access to construction accounting software that automates redundant tasks and integrates all of the parts, giving them access to the crown jewel: better reports. With the main five components of construction accounting—job costing, payroll, general ledger, accounts payables and accounts receivable—integrated into the same system, contractors have access to all relevant data to take advantage of extensive reporting.
One important report contractors need is the work in process (WIP) report. Bonding agents, banks and underwriters use WIP reports to determine a contractor’s profitability. The report shows whether the contractor is properly estimating costs for jobs and is billing an adequate amount. It is also used as a metric for a contractor’s credibility.
The WIP is calculated by multiplying the percent completed costs by the contract amount. After that number is calculated, it is then compared to the amount the contractor has billed thus far. For example, a contractor has a job worth $250,000 with an estimated budget of $200,000. The cost incurred to date is $40,000. By dividing the costs incurred by the estimated budget ($40,000/$200,000) the percent of the job complete is 20 percent. By multiplying the percent complete (20 percent) by the contract amount ($250,000), the amount that should have been billed to date is calculated ($50,000).
Based on the current amount billed at the time, two terms are considered. It shows that the contractor is either “billing in excess of cost” (over-billing) or has “costs in excess of billings” (under-billing).
Bond agents, underwriters and banks like to see “billing in excess of costs” because this shows a contractor is properly estimating costs for jobs and turning a profit. It also shows that the contractor is likely to finish the job on schedule with cash on hand. On the other hand, consistently under-billing displays that jobs are not being managed properly and that the contractor is not estimating jobs accurately as well as hurting its credibility.
The days of calculating the WIP manually are gone. Contractors no longer have to gather relevant information on costs for labor, equipment, materials, etc., for each job and hope their calculations are correct. Hiring an outside party to do the calculations may be expensive and inconvenient, especially when last minute changes need to be made if the third party is not available 24/7.
With construction accounting software, contractors can generate a WIP report with a few clicks. All they have to do is key in job information and contract details and the system will use that data to generate reports. Changes to the job, such as approved change orders, are automatically factored in once entered into the system.
Because all of the main function of construction accounting are integrated, such as job-cost and payroll, contractors already have access to this information. It’s just a matter of using the construction accounting software to put it together.
Eric Goldstein is the President of C/F Data Systems. With over a quarter of a century of experience in the construction software arena, Eric has led C/F Data’s ongoing development of the company’s flagship solution, STRUCTURE. He began his career at ADP, and first joined the C/F Data System sales department in 1985 and was quickly promoted to Vice President of Sales. After sales positions with Timberline software and Textura, Eric returned as C/F Data’s President in 2009.
FAQs
What is Work in Progress (WIP)? Work in Progress (WIP) is an essential part of construction accounting. It calculates the progress of all ongoing work, allowing you to see what's been done and what's left to do—helping you manage budgets effectively.
What should be included in a WIP report? ›
[Sample WIP Report] Work-in-progress reports will generally include the contract amount, estimated costs, costs to date, the percent complete, billed revenue, earned revenue and over/under billings.
How do you record construction work in progress? ›
Open a construction-work-in-progress account under the company's balance sheet's property, plant, and equipment section. If the company has multiple CIPs, the accountant will categorize each project separately. Track every cost, including materials, tools, labor, transportation, and extraneous expenses.
Why is construction accounting difficult? ›
You can't simply create a generic accounting book template and use it for all of your projects indefinitely. Fluctuating costs can make construction accounting difficult as well. The price of building materials and labor may change from month to month or even week to week, depending on market conditions.
What is the accounting entry for WIP? ›
What is the accounting entry for WIP? The accounting entry for WIP considers the three main cost components of inventory accounting: raw material, labor cost, and overhead costs. The cost components are summed to get the cost of when items go from WIP to being considered a finished good.
What is an example of work in process WIP? ›
If raw material is combined with direct labor but is not ready to be sold, it counts as WIP inventory. For example, if a company sells bags of coffee, their WIP inventory would include bags, labels, coffee beans, and shipping boxes.
How do you analyze a work in progress report? ›
One method is gain/fade analysis. This breakdown compares the original gross profit from takeoff to the expected gross profit at completion as the project is progressing. If the gross profit calculation comes in higher than originally estimated, this is known as a gain.
What is work in process for dummies? ›
Work-in-process refers to the costs incurred for a partially completed product; these costs are recorded in an inventory (asset) account.
How do you account for WIP on a balance sheet? ›
Assuming you had no opening WIP, then you would debit WIP in the balance sheet and credit cost of sales. This has the effect of moving the value of WIP out of the P&L and into the balance sheet as an asset. The purchases code to use would be wherever you initially allocated the costs.
What type of accounting is used in construction? ›
Construction companies can choose among different accounting methods: cash, accrual, percentage of completion, and completed contract. These four approaches differ in how they track income, expenses, and profit. Each method of accounting has advantages and disadvantages.
Calculations: Revenue to date = % complete * contract price. Cost to date = Cost to date from previous year + Costs incurred in current period. % complete = Cost to date / Total estimated costs.
What is the double entry for WIP? ›
Once the product is complete, the company needs to reclass the value of that inventory to finished goods since it is now ready to be sold. The journal entry would be a debit to inventory-finished goods and a credit to inventory-WIP.
Which method of accounting is best for construction company? ›
The percentage-of-completion method (PCM)
In many cases, PCM is the required method of income reporting. As a result, PCM is the most widely used construction accounting method. As implied by the name, this accounting method enters revenue and expenses based on the percentage of completion for each project.
What is unique about construction accounting? ›
Construction accounting is a specialized domain, distinct from general business accounting, focusing on the unique dynamics of construction projects. Techniques like the Percentage-of-Completion Method and Completed Contract Method determine when revenues and expenses are recognized in construction accounting.
What is the difference between construction accounting and financial accounting? ›
Financial systems are geared around single-year accounting.
They are meant for annual reporting. Every year, you close the books, report the numbers and zero out the budget. Funding for construction projects must be tracked across multiple years, since the duration of most projects stretches beyond 365 days.
How do you calculate earned revenue in construction? ›
Progress Measurement: Regularly measure and record the actual progress of each task or activity completed by the project's reporting date. Calculating Earned Revenue: Multiply the percentage of work completed by the assigned revenue value for each task to determine the earned revenue for that task.
What is earned revenue in construction accounting? ›
Earned Revenue = contract amount * % complete. This is the amount of revenue you have earned on each job based on your percent complete. Billed to Date – This is the amount you have billed as of the reporting date (month end, year end, etc.)
How do you calculate percentage of work done in construction? ›
To determine the percentage of completion, you divide current costs by total costs and multiply the result by 100.
