Construction Work in Progress (“WIP”) Report: Impacts of Over and Underbilling on Bonding
- Mar 22, 2023
By Donald Hoffman
Construction Work in Progress ("WIP") reports show the progress of a construction project and whether it's overbilled, underbilled or on budget. Bonding companies rely heavily on WIP reports to track a company's job profitability over time and locate profit fade or gains. This article will discuss how overbilling and underbilling can occur on WIP reports and how they may affect your construction firm's bonding capacity.
Overbilling and underbilling on Work in Progress
If you have substantial underbillings, this is typically a red flag that you may be overstating your profits and deserve more scrutiny from bonding agents. Sometimes underbillings are caused by unapproved change orders; however, remember that until a change order is approved, it should only be included as part of the contract price once a signed change order is available. Underbillings can also be generated when the projected profits on a contract are overstated, resulting in budgeted costs that are lower than the actual cost that will result at completion, reflecting a higher percentage of completion at a point in time that is not in line with the actual completion of the contract.
On the other hand, overbilling may occur if you have a favorable schedule of values built into your contract. Be aware that whoever you are billing will scrutinize the percentage complete on each schedule of value to avoid paying you in advance. Even though overbillings help cash flow now, we need to be mindful that we could potentially run into cash flow challenges down the road when those overbillings no longer exist.
We encourage companies to be conservative with projected profits, as the bonding company will track every projection you provide to determine whether you can stay on track with your projections. If they see that you continually experience profit fade (when the profit from a job is less than anticipated) on contracts, they will lose confidence in management and severely impact your construction company's bonding capacity.
WIP reports that reflect overbillings and underbillings are the lifeblood of your financial statement. The contract price, budgeted cost and projected profit should be updated monthly and given the attention these categories deserve so you can manage your business properly and make informed decisions based on the monthly profits and losses your construction firm is achieving.
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- Construction Work in Progress (“WIP”) Report: Impacts of Over and Underbilling on Bonding
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Donald N. Hoffman
Donald Hoffman is Partner-in-Charge of the firm's Maryland office. His expertise includes accounting, tax planning, business consulting, strategic planning, business succession, buy/sell agreements, and estate planning.
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