WIP Reporting: Spotting Risks Before They Become Debt

The use of WIP reports for construction contractors is much like that of a lighthouse for guiding ships. The National Oceanic and Atmospheric Administration (NOAA) has this to say about lighthouses: “The messages of these long-trusted aids to navigation are simple: either STAY AWAY, DANGER, BEWARE! or COME THIS WAY!” 

For construction contractors, percentage of completion WIP reports act like a lighthouse and reveal much concerning what’s ahead. By paying attention to the signals, construction business owners can see and address financial issues before they escalate into significant cash flow problems. In other words, they can spot financial risks before they become debt. 

Proactive Risk Management

Using WIP reports, contractors can spot risks before they become debt and impact cash flow. Here are three overall ways a WIP report guides a construction business owner to manage financial issues better:

1. Provide accurate financial information.

2. Identify project delays and other issues. 

3. Spotlight where reallocation of resources is necessary.

Proactive risk management includes the use of WIP reports. Interestingly, WIP reports not only help you spot potential risks, but they can also prompt you to take specific actions to manage particular risks.

Spotting the Risk of Underbilling

The project is underbilled when the percentage of work completed exceeds the percentage billed. That means that the construction company is financing a portion of the project!

WIP Report Prompt: Submit billings that align with the work completed.

Spotting the Risk of Overbilling

The project is overbilled when the percentage of work completed is less than the percentage billed. This can create a misleading picture of the company's financial health, lead to customer distrust, and may become a future liability. 

WIP Report Prompt: Adjust financial records to align the billed amount with the actual percentage of the project completed. Then, contact the client directly, explain the error, and note what steps have been taken to correct it.

Spotting the Risk of Cost Overruns

The project is facing cost overruns when money is spent above what the budget called for. This can be caused in many ways, some of which are:

• Project scope creep

• Budgets that lack itemized detail

• Frequent change orders

• Unexpected staffing changes

• Schedule slippage

• Rework costs

• Purchasing outside of budget limits

WIP Report Prompt: Establish a strong budget baseline, including a contingency fund to cover unforeseen expenses. 

Spotting the Risk of Profit Fade

Profit fade happens when the estimated margin decreases over time. It signals issues like rising costs or project inefficiencies. WIP reports track the estimated profit margin throughout the project.

WIP Report Prompt: Employ accurate estimating with contingency funds, diligently track job costs, proactively manage risks, and engage in strong communication between the field, project managers, and finance teams to identify and correct issues in real-time.

Cash Flow Forecasting 

Spotting risks before they become a debt – let’s talk forecasting!

Avoiding shortfalls is vital. The bottom line is that WIP reports provide accurate cash flow forecasting metrics. 

Key metrics in a WIP report include: 

• Costs incurred to date 

• Billed to date amounts

• Remaining contract value 

Contractors can use these metrics to project future cash flow needs and avoid unexpected problems. 

Spotting risks before they become debt is aided by WIP reports. Cash flow visibility means adding a powerful tool to your financial toolkit. Learn more in our 4-part series starting with “WIP Reports – A Powerful Tool in Your Financial Toolkit.”

(You’ll find the links to the three other series parts there.)

Essential Takeaway: Accurate WIP reports help prevent surprise borrowing. 

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735