Construction Work in Progress: The Comprehensive Guide

The expenses of constructing a permanent asset are kept in an account in the general ledger. This account typically has a debit balance and is reported within the balance sheet’s property, plant, and equipment line item. One of the biggest concerns for construction firms and contractors is cash flow. With progress payments, they can receive a steady stream of income throughout the project instead of waiting to be paid in a lump sum at the end of the job.

Analyzing Your WIP

It’s crucial to monitor the development of your project to prevent expensive overruns. Using a burn-down chart based on actual cost and work completed can give an early warning if productivity is slipping. It’s a meaningful way to nip potential cost overruns and prevent them from ballooning. Creating accurate WIP reports requires collaboration between operations and accounting. PMs understand real-time costs better than spreadsheet calculations and know what it will take to finish a job on time and as described. Inaccurate WIP can cause overbilling, which may signify your business financing its projects rather than focusing on cash flow. It will ultimately slow project delivery times and affect the bottom line. If you create protocols that simplify tracking stock and reporting time, the team won’t need to spend an hour on administrative tasks at the end of each day.

Tracking Your WIP

Ensuring cost estimates, completion percentages, and billing expectations are correct is one of the most critical components of construction work. If any of these numbers are correct, it can save your entire project schedule and cost. Choose a card that has completed the majority or all of the process on your board. You’ll have a precise idea of how long projects take your team to complete from beginning to end, which might help with budgeting. Manual calculations leave room for error, but using a Kanban tool with built-in accounting can automate these processes and prevent errors. The right solution can help you identify issues early and prevent costly mistakes that affect project profitability. It also helps ensure that the correct materials are diverted to locations for painting, subassembly, or other processing steps.

Managing Your WIP

When you have accurate, timely WIP reports, it’s easier to see which projects are on schedule and which may be at risk. It helps you nip cost overruns while facilitating accurate financial reporting.

If you are implementing Kanban, it’s essential to have team buy-in when setting up your WIP limits. Ideally, your team members should set their limits, as they know their capacity best. They might need to experiment with this at first, but once they get a feel for their WIP limits, they’ll be likelier to stick to them. Your team might limit the number of work items per lane on their board. If this doesn’t reduce their WIP, they might add a process stage limit or personal WIP limits.

Reporting Your WIP

The work-in-progress (WIP) report is a critical inventory account for manufacturers, media and film companies, construction contractors, or any business entering long-term contracts. It helps management gauge profitability on individual projects by analyzing earnings versus expenses. It is done by subtracting billed amounts from earned amounts and comparing them to current costs. A WIP report should be analyzed frequently to detect any profit fade. Overbillings (or billings over costs) and under billings signify that the contractor financed the project rather than being paid by the customer. It can put the project in jeopardy of finishing behind schedule and negatively impact the final profit margin. To avoid this, you should regularly reassess your estimating process to see if the rates accurately reflect how long the team takes to perform tasks in the field. 

*This is a collaboration post