In the past, contractors relied on paper and a variety of methods to manage their accounting needs. The problem was the time and effort it took to consolidate the data and generate reports.
Now contractors have access to construction accounting software that automates redundant tasks and integrates all of the parts, giving them access to the crown jewel: better reports. With the main five components of construction accounting—job costing, payroll, general ledger, accounts payables and accounts receivable—integrated into the same system, contractors have access to all relevant data to take advantage of extensive reporting.
One important report contractors need is the work in process (WIP) report. Bonding agents, banks and underwriters use WIP reports to determine a contractor’s profitability. The report shows whether the contractor is properly estimating costs for jobs and is billing an adequate amount. It is also used as a metric for a contractor’s credibility.
The WIP is calculated by multiplying the percent completed costs by the contract amount. After that number is calculated, it is then compared to the amount the contractor has billed thus far. For example, a contractor has a job worth $250,000 with an estimated budget of $200,000. The cost incurred to date is $40,000. By dividing the costs incurred by the estimated budget ($40,000/$200,000) the percent of the job complete is 20 percent. By multiplying the percent complete (20 percent) by the contract amount ($250,000), the amount that should have been billed to date is calculated ($50,000).
Based on the current amount billed at the time, two terms are considered. It shows that the contractor is either “billing in excess of cost” (over-billing) or has “costs in excess of billings” (under-billing).
Bond agents, underwriters and banks like to see “billing in excess of costs” because this shows a contractor is properly estimating costs for jobs and turning a profit. It also shows that the contractor is likely to finish the job on schedule with cash on hand. On the other hand, consistently under-billing displays that jobs are not being managed properly and that the contractor is not estimating jobs accurately as well as hurting its credibility.
The days of calculating the WIP manually are gone. Contractors no longer have to gather relevant information on costs for labor, equipment, materials, etc., for each job and hope their calculations are correct. Hiring an outside party to do the calculations may be expensive and inconvenient, especially when last minute changes need to be made if the third party is not available 24/7.
With construction accounting software, contractors can generate a WIP report with a few clicks. All they have to do is key in job information and contract details and the system will use that data to generate reports. Changes to the job, such as approved change orders, are automatically factored in once entered into the system.
Because all of the main function of construction accounting are integrated, such as job-cost and payroll, contractors already have access to this information. It’s just a matter of using the construction accounting software to put it together.