The Work in Process schedule (WIP) is one of the most important reports produced by a contractor's accounting system. Surety companies rely heavily on this report to review the progress of construction contracts underway at that time. If used properly, the WIP can be a valuable tool for the contractor as well.
A WIP report is a detailed schedule that ideally includes information on both in-progress and completed contracts for the current period. The schedule typically contains the following columns, but can contain additional information depending on the software system:
the contract price
billings to date
costs incurred to date
estimated cost to complete
estimated gross profit
The primary purpose of the WIP report is to allow the contractor to monitor how they are doing on their jobs. While a project is underway, the estimated cost to complete should be constantly monitored and adjusted as necessary. Additionally, when change orders are encountered on a project, the contract price, total cost and estimated profit figures will change. Whenever a WIP is produced, jobs completed since the date of the last WIP should be included as well. Completed job information is useful in analyzing job performance trends comparison of original estimated gross profit to final margins earned on each contract.
Why a WIP is important for a surety company?
While the WIP is a valuable tool for the contractor to monitor the progress of their contracts, it is also important to the surety. In addition to monitoring job profitability, the surety is also able to track profitability over time and spot profit fade and gains. The surety is also able to evaluate billing practices by evaluating the over and underbillings and confirm that the balance sheet is an accurate reflection of the contractor's financial condition.
When reviewing WIP information, a surety will notice:
Significant and recurrent underbillings may indicate slow billing practices, or possibly unapproved change orders for which the contractor cannot bill and may not be paid. If significant overbillings exist, the surety will wait to see significant cash and receivables in the balance sheet. More on overbillings and underbillings.
What is the contractor’s backlog and is there profit left in it?
Surety underwriters monitor the amount of work their contractor customers have on hand to make sure that it remains within the contractor’s ability to handle it. The financial strength of the firm and past experience are taken into account in determining how large a backlog the contractor should be able to handle. Profit left in the backlog will help cover overhead in the future, so profit remaining in the backlog is compared to expected overhead.
Getting the right information from your CPA
As an end user of your financial statement, your Surety expects CPA provided information to include both in-progress and completed job information. You've hired your CPA to provide reliable and accurate information, so it is important to make sure you are getting the documents you need to support your desired bond program.
At Old Republic Surety Company, we work closely with our customers and their CPAs to outline what reports, including WIPs, are necessary to maximize their bond program. We are also willing to suggest ways that a contractor might improve their balance sheet to become more competitive and ultimately grow their business. Contact your independent insurance agent for more information about bond programs with Old Republic Surety Company.