Your Jobs Look Profitable. So Why Is Cash Tight?
What a WIP report tells you
5 minute read
You’ve got crews working, supplier bills coming in, and payroll due Friday. Your P&L says you made money. So why are you drawing on the line of credit again?
For a contractor, profit and cash don’t always move together. A monthly Work in Progress report, usually called a WIP, helps you see how billing and expected profit are shaping up on each open job. It’s a good place to start when the numbers don’t seem to line up.
What a WIP Report Tells You
For each open job, we want to know what you expect to make, what it will take to finish, and how billing compares with progress. That means looking at the contract amount, costs so far, your current estimate of the remaining costs, and what you’ve billed.
The estimate matters. If the cost to finish hasn’t been updated since you bid the job, the report can make your profit look better than it really is.
Underbilling and Overbilling
Underbilling means the revenue earned on a job is ahead of what you’ve billed. You may be behind on invoicing, waiting on a billing milestone, or doing work that hasn’t been approved yet. That’s different from sending an invoice and waiting to get paid.
Overbilling means you’ve billed ahead of the revenue earned on the job. If you’ve collected that money, your bank balance may look healthy, but you still have costs ahead of you. You need to know how much work that money has to cover.
Neither position is automatically a problem. What matters is knowing why you’re there and what it means for the cash you’ll need to finish the job.
A Simple Job Example
Say you’re a mechanical contractor working on a $200,000 job. You currently expect the job to cost $160,000, and you’ve spent $120,000 so far.
Using costs as a measure of progress, you’re about 75% complete. That puts revenue earned at $150,000. If you’ve billed $110,000, the job is $40,000 underbilled.
· Contract amount: $200,000
· Current estimated total cost: $160,000
· Cost to date: $120,000
· Estimated completion: $120,000 / $160,000 = 75%
· Revenue earned: 75% of $200,000 = $150,000
· Billed to date: $110,000
· Underbilling: $150,000 – $110,000 = $40,000
That $40,000 tells us earned revenue is ahead of billing. It doesn’t tell us whether you can invoice it all today or how quickly the customer will pay.
The next question is why. Did we miss a billing deadline? Are we waiting on a milestone? Is there unapproved work? Does the estimate need another look? The report tells us where to start.
What To Do With the Numbers
The value of a monthly WIP review is catching problems while you can still do something about them. If a job is ready to bill, get the pay application submitted. If an invoice is already out, follow up on collection. Those are separate steps, and both affect payroll cash.
If a job’s expected margin is shrinking, look at what’s changed. More labor hours? Higher material costs? Work outside the original scope? Review whether a change order is supported by the contract and the work performed. Don’t assume every extra cost can be passed along to the customer.
Where costs can’t be recovered, update the forecast so you can see the expected hit to profit. It’s better to know while the job is running than to find out after the crew has moved on.
A current WIP also gives lenders and bonding companies a clearer view of your backlog and expected job results. It helps you explain the business with numbers you can stand behind.
How Midwest CPA Helps
WIP reporting is part of our outsourced accounting for contractors. We keep the accounting current and work with you and your project managers to update what each open job will cost to finish.
Your team knows what’s happening in the field. We help connect that information to the numbers, then review the jobs that need attention with you.
That conversation should get specific: When can we bill this? What changed in the estimate? How much will it take to finish? Do we need to follow up on a pay application or look more closely at the remaining labor budget?
We also help keep the reporting consistent for conversations with lenders and bonding companies, and coordinate it with tax planning and reporting as appropriate. The goal is a monthly review you can use to run the business.
Common Questions From Contractor Owners
Is a WIP report only for big contractors?
No. If your jobs run across months, you can benefit from seeing billing and expected profit by job, whether you’ve got three open jobs or thirty.
Is being underbilled always bad?
No. It may reflect the billing terms or timing. You still want to understand the reason, when you can bill, and how you’ll cover costs in the meantime.
How often should we update it?
Monthly is a useful starting point. Jobs with tight cash flow or fast-changing costs may need attention between monthly reviews.
Does a WIP replace the P&L?
No. Your P&L shows company results for the period. Your WIP adds detail about open jobs, expected margins, and billing. You’ll also want to review unpaid invoices and upcoming cash needs.
Let Us Take A Look At Your Open Jobs
If you’re using the line of credit to cover payroll while your P&L shows a profit, let’s take a look at your open jobs. We’ll talk through your billing process, and whether a monthly WIP review would help.
Reach out to Midwest CPA to start the conversation.