Boo! What’s Hiding in Your WIP?

Not every surprise is a fun one. For many small and mid-size contractors, the most unwelcome surprise of the year shows up in a spreadsheet: the work-in-progress (WIP) report. When your WIP is off, your books can show a profitable year that your bank account never sees. And when the numbers finally catch up, usually at year end, they tend to catch up all at once. The good news? Most WIP problems are habit problems, and habits can be fixed.

What a WIP Report Actually Tells You

A WIP report is a job-by-job snapshot of every open contract: contract value, costs to date, estimated cost to complete, amounts billed, and revenue earned. Percent complete is typically costs to date divided by total estimated costs, so the whole report rests on how realistic your cost estimates are.

That’s why Smith + Howard, an Atlanta CPA firm, calls the estimated cost to complete “the most important input in the WIP schedule.” Get that number wrong, and your earned revenue, profit, and billing position are wrong too.

The gap between what you’ve billed and what you’ve earned is where trouble hides. Underbillings mean you’ve done work you haven’t invoiced. Overbillings mean you’ve collected cash ahead of the work you still owe.

Four Habits That Come Back to Haunt You

Treating overbilling cash as profit. Billing ahead feels great, until the money is spent and the remaining work still needs funding. The Construction Financial Management Association (CFMA) cautions that “project managers should not rely on an overbilling to profit the project,” warning that spending that cash early can dry up funds later in the job.

Explaining away underbillings. One underbilling isn’t a crisis. A growing list is a signal. James Moore & Co., a Florida CPA firm, points out it could mean unbilled work, a buried loss, or margin erosion already underway. Their advice: “A growing under-billing deserves scrutiny before it gets explained away.”

Letting estimates go stale. If the estimated cost to complete hasn’t changed since bid day, your percent complete is guesswork. Margins that quietly shrink month after month, known as profit fade, are exactly what lenders and sureties watch for.

Losing track of change orders. Extra work performed before a change order is signed and recorded adds cost without revenue. It distorts your WIP and drains cash at the same time.

Why Your Surety Cares About Your WIP

As your bond program grows, your surety will likely ask for WIP schedules alongside your financial statements. Smith + Howard lists sureties among the key users of the report, since they rely on it to judge a contractor’s financial health when extending bond credit.

Underwriters use your WIP to answer three questions: Are your profits real? Can you estimate accurately? How much more work can you safely take on?

A clean, consistent WIP builds confidence, and confidence supports bonding capacity. Repeated profit fade, unexplained underbillings, or a year-end report that contradicts your midyear numbers can make an underwriter more cautious. That could mean lower single-job or aggregate limits right when you’re ready to bid bigger work.

Special Tips for an Accurate Year-End WIP

Your year-end WIP often becomes the foundation of your annual financial statements, which your surety and bank will lean on for months. Keiter CPAs, a Virginia accounting firm, recommends several checks before you close the books. Here’s how they translate for a small or mid-size contractor:

1. Set a cutoff policy. Keiter advises putting a cutoff policy and review process in place so every job cost lands in the right period. Invoices that arrive in January for December work are a common miss.
2. List every job, including finished ones. Your schedule should cover jobs completed during the year, not just open ones. As a completeness check, Keiter suggests comparing total earned revenue on your WIP to revenue in your general ledger.
3. Update contract amounts and estimates. Add approved change orders and refresh each estimated cost to complete with your project managers. If an estimate moves, be ready to explain why.
4. Run a reasonableness check. A job showing more than 100% complete needs a second look at its costs, and closed jobs shouldn’t still carry an over- or underbilling.
5. Compare year over year. Look at jobs finished this year against where they stood last year to spot profit fade.
6. Record projected losses. If a job is heading for a loss, make sure it’s accounted for properly. Keiter notes that some accounting software won’t flag it for you.
7. Loop in your CPA and explain the big swings. An early review beats surprises at tax time, and a short note on any job with major margin changes keeps your surety from having to guess.

As Keiter puts it, “Monthly or quarterly reviews will make your year-end review much smoother!”

Make WIP a Monthly Habit, Not a Year-End Scramble

The contractors who sleep best in December are the ones who updated their WIP all year. A quick monthly review with your bookkeeper and project managers catches problems while there’s still time to fix them, and it shows your surety you know exactly where every job stands.

Don’t let sloppy WIP habits haunt your financials, your cash flow, or your bonding capacity. A little discipline now keeps the scary surprises where they belong: Halloween festivities.

Ready to Bid Bigger? Let’s Talk Bonding.

Whether you’re bidding your first bonded job or looking to grow your bond program, Colonial Surety Company is here to help. Explore our bonding programs, or reach out to our team with questions so you can position your company for growth. 

For bonds up to $500K, Colonial Surety’s Hometown Bond Program is a credit-based option for contractors who are newer to bonds or need them occasionally.

For larger bonds, The Partnership Account® for Contractors gives qualified builders a surety line of credit in writing of up to $20 million single and $40 million aggregate, plus the power to issue their own instant bid bonds. 

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