Maintaining profits and keeping jobs on track is not easy in the construction industry. There are bills to pay, materials to order, teams to manage, and everything else in between.
Accurate Work in Progress (WIP) reports are essential to keep projects running smoothly and grow your bottom line. When it comes to surety bonding, it’s important that you understand your WIP report so you can maximize your surety bonding capacity.
What is a Work in Progress (WIP) Report
A WIP report, one of the most important reports in construction accounting, calculates the progress of all ongoing work, allowing you to see what's been done and what's left to do—helping you manage your jobs effectively and properly recognize revenue. This information can then be used to generate reports and track project development using "percentage complete" figures.
Typically, the items you need to generate a WIP report include:
- The total current value of the contract
- The total original estimated costs
- Revised estimated costs
- The total costs to date
- The amount billed to date
The WIP report will then calculate the:
- Amount of revenue earned to date
- Percentage completion of the project
- Whether a project is currently over or underbilled
Why WIP Reports are Used in Surety Bonding
A surety bond company uses WIP reports to look at a company from a third-party perspective to understand how your profit margins hold through a job, if there are sizeable over or under billings and if anything looks out of the ordinary. This is why it’s important for contractors to frequently run WIP reports, ensure their accuracy and share their WIP reports on a regular basis with their bonding agent. Not only are WIP reports used in the prequalification process of attaining a surety bond, but they are also used on an ongoing basis since the surety is evaluated regularly.
What Does a Surety Bond Company Look for in a WIP Report?
Backlog
Reviewing a construction business's backlog shows a surety bond company whether the business has enough backlog to stay profitable, if they need more work, or if it is stretched too thin and may not meet its schedules. Since surety bonds are reviewed on an ongoing basis, the surety bond company is constantly monitoring your backlog.
Trend Analysis
WIP reports show many different kinds of trends. In your WIP reports, underwriters look at trends such as over- or under-billing, project size, project profitability, whether certain project types, such as Design-build, are actually making money, and whether the workload is increasing or decreasing at a normal rate.
Over/Underbilling
Overbilling happens when you've billed for a higher percentage of the contract than the actual percentage of work completed. While this can positively impact cash flow, it could be a problem if not managed properly.
The overbilling amount needs to be held in reserve to fund future work that has not yet been completed. The surety's concern is that you will not be able to finance the completion of the project if the overbilling is not held in reserve.
Underbilling occurs when contractors bill less than the amount earned for the work completed to date. This can be problematic and cause negative cash flow, as you are now funding the work that is currently being completed.
Surety bond underwriters rely on a strong balance sheet when determining the company’s financial strength and want to see the over- and underbilling properly reflected in your P&L and balance sheet.
How Construction Accounting Software Can Help with the Bonding Process
Construction accounting software helps your business run smoothly and avoid errors due to its automation—eliminating manual calculations. Software, like Deltek ComputerEase, provides you with real-time updates on project progress through WIP reports, accurately keeping track of jobs and budgets, and allowing you to identify problems before they arise.
Remember, it is best practice to produce a WIP report on a regular schedule—monthly at a minimum. By doing this, you will not only have a good tool to better manage your business, but you will have your WIP report ready to provide when outside entities, such as your surety underwriter or bank, ask for it.
By frequently running your WIP report through your construction accounting software, understanding your WIP report, and sharing it with your bonding agent on a regular basis, you are stepping in the right direction to obtaining surety bonds.
