For many years, contractors have relied on paper as well as a variety of methods to manage their accounting needs. One main challenge was the amount of time and effort needed to handle those tasks.
Redundant tasks can now be automated with the emergence of construction accounting software. Contractors have access to all relevant data to take advantage of extensive reporting when the main five components of construction accounting—job costing, payroll, general ledger, accounts payables, and accounts receivable—are integrated into the same system.
THE WIP REPORT
One important report contractors need is the Work in Process (WIP) report. Bonding agents, banks, and underwriters use WIP reports to determine a contractor’s profitability. The report shows whether the contractor is properly estimating costs for jobs and is billing an adequate amount. It is also used as a metric for a contractor’s credibility.
The WIP is calculated by multiplying the percent completed costs by the contract amount. After that number is calculated, it is then compared to the amount the contractor has billed thus far. For example, let’s say a contractor has a job worth $450,000 with an estimated budget of $400,000. The cost incurred to date is $80,000. By dividing the costs incurred by the estimated budget ($80,000/$400,000) the percent of the job complete is 20 percent. By multiplying the percent complete (20 percent) by the contract amount ($250,000) the amount that should have been billed to date is ($90,000). Based on the current amount billed at the time, one of two terms is used. It states whether the contractor is either “billing in excess of cost” (over-billing) or has “costs in excess of billings” (under-billing).
Bond agents, underwriters, and banks like to see “billing in excess of costs” because this shows a contractor is correctly estimating costs for jobs and making a profit. It also shows that the contractor is likely to finish the job on schedule with cash on hand. On the other hand, consistently under-billing displays that jobs are not managed properly and that the contractor is incorrectly estimating jobs, as well as hurting its credibility.
PLAYS IMPORTANT ROLE
Since the WIP report plays such a crucial role in the success of construction firm, it is obvious to see why contractors take extra care in producing it. Thanks to construction accounting software the days of calculating the WIP manually are gone. Contractors no longer have to gather relevant information on costs for labor, equipment, materials, etc. on their own for each job and hope their calculations are correct. There is no longer a need for contractors to hire an outside party to do the calculations, which may be expensive and inconvenient, especially when last minute changes need to be made and the third party is not available 24/7.
INTEGRATION OF SOFTWARE
The integration of construction accounting software makes creating WIP reports fast and simple. This is because all of the required pieces that make those reports is within the system. All five major areas of accounting are housed within the system. All costs and billings associated with the job are in the system as well. Whenever a contractor sends an invoice, conducts payroll, or creates a Purchase Order, those transactions are logged into the system for future reporting. Changes to the job, such as approved change orders, are automatically factored in once entered into the system. Just click a few buttons and the system will perform the necessary calculations and generate the WIP report. Rather than manually compiling all of that information, taking time and effort, it can now be done instantly. By using construction accounting software to generate WIP reports, contractors can rest assured that the most accurate totals are reported.
Since all of the main functions of construction accounting are integrated, such as job-cost and payroll, contractors will already have to access to this information. It’s just a matter of using the construction accounting software to put it all together.
About the Author:
Eric Goldstein is the president of C/F Data Systems. With more than a quarter of a century of experience in the construction software arena, Eric has led C/F Data’s ongoing development of the company’s flagship solution, STRUCTURE. For more information, visit www.cfdatasystems.com.
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Modern Contractor Solutions, February 2018
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