WIP (work in progress) accounting is a sub’s guide to healthy financials. It’s not just the data in the WIP report that’s valuable; it’s the insights that data can unlock.
This construction-specific accounting method helps you track the financial health of projects so you can better manage costs and protect profitability. If you’re unsure how to apply your WIP data beyond the spreadsheet, this article is for you.
Keep reading to learn how subcontractors can leverage WIP data to:
- Identify potential problems early on and reduce risk
- Gain insights into cash flow
- Improve future bidding and estimation processes
- Streamline data collection from the field
- Communicate insights to project managers
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1. Use WIP data to identify projects at risk.
It’s easy for construction projects to go over budget or fall behind schedule—the two biggest culprits of dwindling profit margins. WIP data can prevent this, but only if the data is accurate and current. And you probably know how easy it is to make WIP accounting mistakes.
When your WIP report accurately reflects the total costs incurred to date and the expected revised budget, two values can help flag jobs that aren’t in great financial shape:
- Estimated profit: Compare your estimated profit to the original scope and previous WIP report to make sure profit margins are holding.
- Over/underbilled amount: If you’ve overbilled, it could be that the project isn’t sticking to its schedule. Even if profit margins are steady now, this can be an early warning sign of a future issue.
Spotting either of these problems could be cause for concern. It’s time to get with the project manager to better understand the current state of the job and (hopefully) develop a plan to course correct.
2. Use WIP data to identify potential cash flow issues.
With cash flow being the number one factor that causes most subcontractors to fail, it stands to reason that cash flow forecasting can make or break your business.
WIP data can often reveal patterns that indicate potential cash flow problems. Watch out for these common patterns:
- Constantly underbilling projects
- Billing behind your costs
- Burning cash to fund the project yourself
If you spot any of these trends, first make sure it’s not a data error and that you’re applying costs to the job correctly. Every invoice should cover all un-billed costs incurred to date.
A few strategies to prevent future cash flow issues include:
- Billing every month: Be prepared to negotiate this when reviewing contracts since this is where payment application terms are set.
- Billing upfront: You can also consider billing overhead or costs related to general conditions upfront.
- Monitor collections: WIP data and A/R aging data can work hand-in-hand to give you an end-to-end picture of the profitability and cash position of each job.
3. Use historical WIP data to improve bidding processes.
Analyzing historical work in progress and final WIP numbers will give you a sense of whether or not you’re bidding appropriately. Make it a regular practice—whether annually or quarterly—to look at jobs that weren’t as profitable as predicted. Could you see the danger looming in the WIP? Look for trends. You might find that certain field teams consistently rack up more labor hours than projected. Or maybe a specific type of job always winds up accruing higher materials costs.
Once you identify the common threads, get with your estimators to share your learnings and discuss adjusting your bidding process to ensure these types of projects are profitable in the future. Some strategies to consider include:
- Making adjustments for specific types of clients or projects in specific states.
- Finding ways to reduce costs for similar jobs—like changing suppliers, sourcing different materials, creating a more efficient process to reduce labor hours, or finding a new lower-tier sub.
- Increasing the allowable negotiated margins to ensure the company can properly fund ongoing jobs.
- Being more aggressive about how you bill out the job to make sure you’re not using an excessive amount of free cash to fund it.
4. Use Siteline to operationalize WIP data.
WIP accounting doesn’t start or end in the back office. It requires pulling data in from the field and communicating insights back out to project managers. Siteline’s construction billing software helps subs operationalize WIP accounting from end to end. You can use it to:
- Streamline WIP data collection and organization: Real-time reporting, reminders, and collaboration tools ensure you never miss important billing data.
- Communicate WIP insights to project managers: The over/under-billing tool gives PMs a quick sense of whether their project is over or under-billed so they can determine how much to bill in a given month.
If you’re ready to replace spreadsheets with insights and runarounds with clear communications, check out Siteline. You’ll get clearer visibility into cash flow and reduce invoice aging by at least 30%. How’s that for a better billing strategy?
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