5 Common Mistakes in Construction WIP Accounting and How to Avoid Them

Work-in-progress (WIP)  accounting is a subcontractor’s lifeline to maintaining positive cash flow. Subs are usually in the unfortunate position of fronting project costs and not getting paid until months after completing their part of the project, which can severely strain their finances. So, if you want to do everything possible to ensure you’re getting paid on time, you should use WIP accounting.

This construction-specific accounting method looks at several project-level metrics to determine whether billings are on or off track. It helps subcontracting accounting teams:

• Quickly identify over- or under-billing issues
• Monitor profit margins as projects progress
• More proactively manage and control costs

Entries You Need for WIP Accounting

Calculating work in progress uses a fairly simple three-step process. The final output is an over- or under-billed amount. To complete a WIP report, you’ll need:

• The project’s total current contract value
• The total original estimated costs  
• Revised estimated costs  
• Total costs to date  
• Revenue earned to date  
• Amount billed to date  
• Percentage of work completed  

Behind each of these data points is a whole world of processes, documents, and steps. A miscalculation for any one of them can derail work-in-progress billing and wipe out the benefits. 

5 Ways to Prevent WIP Accounting Mistakes 

So, let’s look at the most common issues we see in WIP reports. And, more importantly, let’s talk about some practical things you can do to prevent WIP accounting mistakes. 

These prevention tips boil down to three core factors: people, processes, and technology. 

Mistake 1: Poor Expense Tracking and Cost Allocation 

Getting proof of expenses from project managers can be a struggle. But if they don’t submit all the purchase orders in a given period—or worse, they send in a pile of receipts with no clear indication of which line items are tied to which projects—you won’t have an up-to-date view of expenses. 

How to Prevent It

1. Develop a detailed cost allocation process to track project costs accurately. Job costing software can monitor costs at the project level.
2. Create a cost-aware culture and enforce the importance of cost-tracking across the whole company. On this note, document your process to ensure clarity and consistency for future reference.
3. Bring the project and accounting teams together every month to review costs and estimates. Make sure everyone agrees on what’s been completed and that all expenses are accounted for.

Mistake 2: Inaccurate Cost Estimates

Inaccurate cost estimates can stem from the original scope of work or be a consequence of changing variables throughout the project. A couple of common causes are:

• Poor cost estimations during the bidding process
• Fluctuating materials costs and supply chain issues
• Project delays that chip away at resources
• Estimated labor rates that don’t include your gross profit margin

If your cost estimates are incomplete or inaccurate, then your percentage of work complete, estimated profit, earned revenue, and over/under billing calculations will all be wrong.  

How to Prevent It

• Always treat cost estimates as dynamic. Review estimates line by line when preparing a WIP report and account for changes since the original bid. 
• Make sure your change order management process includes a step to update associated cost estimates to reflect approved changes. 
• Look at your team’s process for building estimates when preparing bids. Are they using construction estimating software? Do they review historical cost data? Both of these steps will go a long way toward ensuring estimates are accurate.    

Mistake 3: Outdated Contract Value Estimates

When a contract comes in, one of the first things you look at is the total contract value. But contract value can change over time for various reasons, like unforeseen site conditions, delays from the project owner, change orders, and more. Treating contract value as a static figure will throw off your WIP calculations. 

How to Prevent It

• Make sure you have clear feedback loops between your accounting team and project managers. 
• Review total contract values every time you prepare a WIP report to see if anything has changed. 
• Tighten up your process for managing change orders. 
• Consider construction accounting software that automatically updates contract values to reflect change orders. 

Mistake 4: Not Reconciling WIP Reports With Your General Ledger

Taking the time to reconcile WIP reports with your general ledger and accounting data can help reveal data discrepancies and ensure your financial data is accurate. Skipping this step may save you time now, but will inevitably lead to headaches and extra work down the road. 

How to Prevent It

• Schedule regular reconciliation reviews to make sure your WIP reports match your general ledger accounts, balance sheet, and income statement.
• Consider using accounting software that can link project data with financial statements.

Mistake 5: Ignoring Overbilling and Underbilling Discrepancies

One of the ultimate goals of WIP accounting is to make sure billings and earned revenue line up. So your last calculation—total billed minus total costs minus earned revenue—ideally always equals zero. 

If, more often than not, they don’t, you want to prioritize this issue. Over- or underbilling is a common reason pay apps get rejected and payments are delayed.  

How to Prevent It

• If over- and underbilling occurs regularly, investigate further to find the source.  
• If an invoicing discrepancy causes a pay app rejection, fix the issue right away and resubmit your pay app for the correct amount.  
• Look at construction billing software with advanced functionality to help keep your billing on track. 

Beyond WIP Reporting

WIP reporting is a helpful step toward getting a grip on cash flow, especially when used in conjunction with billing and cash flow forecasting software. Tools like Siteline can forecast billing projections, identify dips in backlog, and predict when you’ll get paid on each project. 

Subcontracting accounting teams also use it to track change orders, manage pay apps, and monitor payment cycles across all of their GCs. They report six times faster billing workflows and three weeks shorter payment cycles. 

If you want to unlock visibility into your cash flow and backlog, request a demo of Siteline today.