A work in progress (WIP) report is a tool used by contractors to track the cost of a project and how much money each phase costs. A WIP report includes the total amount of money spent on the project, the current stage of completion, and the projected end date. This report helps you keep tabs on costs and ensure you are spending enough money on the project.
A WIP report is an important financial analysis tool that contractors use to track project costs. In fact, businesses are consistently searching for the best construction project management software that includes WIP reporting features showing a project's current state, including money spent, outstanding work, and project completion dates.
Too often, a contractor creates a WIP report because he feels obligated to do so, as the bonding agent or the bank requires it.
However, an accurate and timely WIP report is essential for running any project-based business. Work-in-progress information is critical to enabling you to look into the future through forecasted projections.
So why are forecasted projections important? They allow you to be proactive with job data rather than reactive. For example, armed with the information that I have a job that is 50% complete at the cost of 75% of the budget, I still have time to adjust and reduce some of my potential cost overruns.
The most important part of a WIP report is the "work estimates," which are the dollar amounts assigned to different phases of the project. These numbers represent the amount of money already paid to subcontractors and suppliers for the project. They're also known as "cash flows."
While a WIP report includes information about the contractor, such as profit margins, it primarily focuses on the project's finances. The focus makes sense because the goal of a WIP report is to help a contractor manage the project's cash flow.
Guide
How WIP Can Work For You
Learn how accurate construction work in progress (WIP) reports help keep projects running smoothly and grow profits.
Common Problems in WIP Reporting
Several problems can occur during the reporting process. Some of these issues may not affect your company, but they could cause problems if you have multiple projects.
Incomplete or Missing Data
If there isn't enough data to create an accurate WIP report, you won't get any valid results.
For example, if you don't know exactly how many hours were worked on a particular task, then you won't be able to calculate the hourly rate for that job.
Unreliable Estimates
Sometimes, estimates could be more reliable. This happens because people tend to overestimate their abilities. If you ask someone to estimate how long it will take to complete a task, you'll probably get an inaccurate estimate. You might even get a higher number than the required time to finish the job.
Inconsistent Estimating Practices
Another problem with estimating practices is that they vary widely between companies. One company might use a simple formula to estimate a task's duration, while another might use a complex spreadsheet to perform the same calculation.
Inaccurate Projections
When a project is nearing its end, it's common for people to start making inaccurate projections. Poor project projections are more common when the specific task is started later within a project. Maybe the original schedule was unrealistic, so now that the project is almost over, everyone wants to push the deadline back.
How to Create Accurate WIP Reports
How is an accurate and timely WIP report accomplished? A successful company starts with clear communication between its accounting and project managers.
The accountant's role is to question potential inconsistencies in the report, whereas the project manager needs real-time, accurate data from the field.
With that information, the company can make smarter decisions in deploying its resources to maximize business profits. Ultimately, if a company is not making money, everything else becomes irrelevant.
To create accurate WIP reports, you need to take a few steps. The three most commonly used methods for creating a work-in-progress account include units completed, percent completed, and cost-to-finish.
To move forward with deeper project analysis, you must first collect all the necessary data. Then, analyze the collected data to identify areas for improvement. Finally, you should adjust the data based on the new findings.
1. Collect All Necessary Information
You must first collect all the relevant data to create an accurate WIP. This means collecting everything related to the project, including:
- The total cost of the project (including labor, materials, overhead, etc.)
- The date that the project began
- How long did the project take to complete
- What tasks were performed on the project
- The name of every person who worked on the project
- Any other details that you think will be helpful
2. Analyze Your Data
Once you've collected all the necessary data, analyze it to identify what went wrong and what needs to be improved in the future. There are two ways to do this:
- Analyze the data yourself: In this case, you're responsible for analyzing the data and determining whether anything needs to be changed.
- Hire a professional consultant to help you analyze the data: A good consultant will look at the data and make recommendations about what future changes are needed.
3. Adjust Your Data Based on New Findings
After you've analyzed the data, you should adjust the information based on the new findings.
For example, if the project took longer than expected, you should add more hours to the project duration. Similarly, if the project took less time than expected, you would subtract some hours from the project duration.
Tracking and Reporting WIP Helps Teams Stay Organized and Efficient
These activities also allow you to track how much work has been completed and when it's due. Doing these things gives you a better idea of how many hours each employee spends on the project and how much progress has been made toward completing it.
Tracking and reporting WIP also helps you identify problems early. If you notice that one or more employees are spending too much time and effort on a particular task, you can address the issue before it becomes a bigger problem.
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How Work in Progress Can Drive Profitability and Cash Flow
Learn why an accurate and timely WIP report is one of the most essential tools a contractor can use to optimize cash flow.
Benefits of WIP Reports
The importance of WIP reports for analyzing your business cannot be overstated.
Too often, business owners treat a CPA as a bookkeeper, entering numbers and producing reports, rather than acting on them.
Conversely, companies that gather solid WIP reports add value by maximizing their CPA's expertise as a business consultant as they strive to grow their bottom-line profits.
WIP reports enable you to manage your jobs accurately. They are also a key component in creating an accurate financial statement, which is required when analyzing your company's stability and growth.
The WIP report is helpful because it provides a snapshot of a construction project's status at any given moment. You can use this data to determine whether you're making good decisions regarding the project.
For example, if you see you've already spent 80% of your budget on a project and it's still not close to finished, you should reconsider what you're doing.
It would help if you always had an accurate picture of your company's finances, so you know exactly how much you need to spend on projects. If you don't know how much money you'll need to complete a project, you could find yourself overspending on materials and supplies.
If you're having trouble keeping up with expenses, then a WIP report may be just what you need. Using a WIP report, you can quickly identify areas where you're wasting money. You can even use this information to adjust your budgeting process.
If you're working on a large construction project, you'll probably need several WIP reports. Each one will show you how much you've spent on the project and how much more you need to pay before it's complete.
How to Use a WIP Report
You'll likely create a WIP report when you start a new project. This initial report gives you a general idea of how much the project will require.
Once you've created a WIP report, it's best to update it regularly. This way, you'll always know how much you need and how much you've spent. It's also helpful to look back at previous WIP reports to understand how long certain project parts took to finish.
WIP Report Uses
Contractors often start as smaller businesses, with the owner walking around knowing everything about every job and its progress. He has his finger on the pulse of the industry.
However, as a company grows, visibility becomes increasingly obscured. No one wants to do twice as much work to make the same amount. When a comprehensive construction accounting system is implemented, everyone becomes aware of the projects that make and lose money.
Real-time, accurate job costing is similar to keeping score in a game. If a project manager knows the score, they can make better decisions about the next play.
You can use a WIP report to:
- Determine whether you're spending too much money on a project
- See how much time you're spending on a project
- Identify potential problems with a project
- Make sure that you're completing all the necessary tasks
