The construction industry is a complex and ever-changing field that relies on precise accounting practices to maintain financial stability and facilitate growth. In contrast to traditional accounting, which often centers on routine, day-to-day business operations and transactions, construction accounting is primarily project-oriented, with expenses being assigned to specific contracts. Not only this, but contracts are often long-term, spanning multiple accounting periods and involving fluctuating material and labor costs. As such, effectively managing accurate Work in Progress (WIP) is a crucial component of construction project accounting.
What Is a WIP Report?
Rather than waiting for project completion, A WIP report, also referred to as a WIP schedule, represents the status of construction projects that are currently underway but have not yet been completed. Construction WIP reporting often combines a record of the direct labor, materials, subcontracting costs, and allocated overhead associated with the construction project as it is performed, offering visibility not only into the individual projects but also into the company's overall financial health.
For each open job, the WIP schedule should include the following:
- Total contract amount
- Estimated costs to complete
- Estimated profit and profit percentage
- Actual costs to date
- Billings to date
- Project percent complete
- Revenue recognized
- Over/underbilling
- Backlog - revenue
Due to all the job costing data required, managing WIP projects can be challenging, and it can significantly affect the accuracy of revenue reporting and profits. For instance, if a company underestimates the cost of a WIP project, it may lead to inaccurate revenue reporting and lower profits. On the other hand, overestimating the cost of a project may lead to overcharging clients, which can damage a company's reputation.
Additionally, construction companies looking to receive funding from a lender or investor will need to see timely and accurate WIP reporting to understand how current projects are tracking as required by U.S. GAAP.
To mitigate the risks associated with managing WIP projects, construction companies can leverage Outsourced Accounting Services. Outsourcing accounting services can enable construction companies to manage their finances effectively, reduce costs, and focus on their core business activities.
Common Reasons Why Construction Companies Might Need Outsourced Accounting Help
- Shortage of accounting talent: Outsourced accounting services can help construction companies by providing a team of experienced and professional accountants who not only specialize in the construction industry but also in managing WIP reporting.
- Insufficient accounting methodologies: Despite technological advances, many construction companies still manage their WIP schedules on basic systems like Excel, which may be time-consuming and contain inaccurate data. Outsourced accounting services can help construction companies improve or set up a more robust accounting system to facilitate better WIP reporting – whether on QuickBooks or Sage 300.
- Secure bonding/funding for the next project: Outsourced accounting services professionals can help construction companies develop accurate, up-to-date, and forward-looking financial reports that include relevant information about WIP projects and instill confidence in lenders and investors.
- Cash flow problems: Since WIP schedules represent projects not yet finished and, therefore, not yet paid for, construction companies often face difficulty managing their cash flow. Outsourced accounting services can assist companies to effectively manage cash flow by providing accurate financial reports that enable them to make informed decisions about financing and cash flow management.
Are You Ready to Outsource Your WIP Construction Projects?
Managing WIP reporting can be a challenge for construction companies for any number of reasons, but Cherry Bekaert's Outsourced Accounting Services team can provide valuable support. Our team has the knowledge and experience to effectively manage your WIP projects, providing you with better visibility and reporting capabilities—a roadmap to get you to a future state of more robust reporting.
With several of the construction clients we assist, we often find that they have a handle on their material costs and paying those invoices; however, they have less of a grasp when it comes to their subcontractor costs. Therefore, our process starts with the proper coding of all activities by project and vendor, allowing you to capture the actual cost of the project to date and estimate future costs.
This insight provides management with the ability to make informed decisions that will affect the gross margins of the individual project as well as identify areas for improvement. For instance, are your projects tracking under or over budget? Moreover, the ability to track projects in the backlog (revenue yet to be earned) on your contracts is important, especially in lending relationships, and properly managing WIP allows for this.
As a full-service accounting and advisory firm, we can also provide guidance on tax planning and compliance, minimizing the risk of non-compliance and maximizing tax savings for your construction company. We also understand the importance of managing retainage, which can create cash flow problems for contractors with limited cash reserves. Retainage is the portion of the contract price that is withheld by the client until the project is completed. Our outsourced accounting services can help you manage retainage and reduce its impact on cash flow.
We offer access to systems such as Sage 300, which automates processes and provides real-time insights on the cloud. We can also analyze your current systems and provide recommendations for integration overlay, optimizing functionality between project management and financial management tools.
Your Guide Forward
Cherry Bekaert's Outsourced Accounting Services provide versatile and practical solutions for companies across various industries. With a dedicated Real Estate & Construction group, our professionals are well-versed in the unique needs of the industry. By offering cost-effective and tailored solutions, construction companies can overcome their accounting and finance challenges while streamlining procedures using best-in-class technology. Moreover, our services provide compliance support for regulatory requirements.
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