Kaitlyn H. Axenfeld, CPA/CFF, CFE, Dannible & McKee, LLP
For many construction companies, bonding capacity is an important tool for supporting growth. Whether a contractor is pursuing larger projects, expanding into new markets or competing for public work, the surety needs confidence that the contractor understands its numbers.
Financial statements show where a company stands at a point in time, but the work in progress (WIP) schedule provides insight into how individual jobs are performing and the risk associated with work still underway. It helps sureties assess whether estimates are realistic, margins are changing, losses are being recognized in a timely manner and management is monitoring project performance.
A well-prepared WIP schedule can strengthen a contractor’s credibility and support bonding capacity. An inaccurate, inconsistent or difficult-to-explain schedule can quickly raise concerns.
From a generally accepted accounting principles (GAAP) perspective, the WIP schedule is more than an internal management report. For contractors recognizing revenue over time under ASC 606, Revenue from Contracts with Customers, it often supports the measurement of progress, estimated total contract costs, revenue recognized to date and related contract asset or liability balances. As a result, WIP estimates need to be current, supportable and consistent with the financial statements.
1. Accurate Cost-to-Complete Estimates
The foundation of a reliable WIP schedule is a realistic estimate of what it will cost to finish each job.
Problem jobs often begin with overly optimistic cost-to-complete estimates. Even relatively small forecasting errors can result in significant profit fade by project completion. Strong contractors regularly update forecasts, incorporate input from the field, monitor labor productivity and material costs, and reflect known problems as they emerge.
When jobs consistently finish near the gross profit projected during construction, it demonstrates strong estimating discipline and project oversight.
2. Timely Recognition of Job Losses
Few things undermine credibility with a surety faster than delaying recognition of an expected job loss. Sureties understand that not every project will perform as planned. The concern arises when significant losses appear suddenly after months of favorable reporting.
Under U.S. GAAP, when current estimates indicate that a contract will result in an overall loss, the expected loss is generally recognized in the period it is identified rather than deferred until project completion.
Contractors therefore need a disciplined process for identifying cost overruns, reassessing estimated costs and recognizing anticipated losses. Warning signs can include significant underbillings on troubled jobs, repeated profit fade, substantial year-end adjustments, and sudden write-downs. From a surety’s perspective, transparency builds trust. Surprises do not.
3. Consistency Between Financial Statements and WIP Reports
The WIP schedule should reconcile to the contractor’s financial statements. Job costs should agree with the general ledger, revenue should align with accounting records, retainage should be reconciled and contract asset and liability balances should be supported.
ASC 606 changed the terminology and presentation historically associated with underbillings and overbillings. Amounts previously described as costs and estimated earnings in excess of billings, or billings in excess of costs and estimated earnings, are commonly presented as contract assets or contract liabilities, depending on the facts and circumstances. This makes reconciliation among the WIP schedule, billing records, retainage and general ledger particularly important.
4. Monitoring Profit Fade and Gain
Sureties pay close attention to changes in estimated gross profit. Some fluctuation is normal, but recurring profit fade may indicate estimating problems, weak project management or delays in identifying cost overruns.
Contractors should compare original estimated gross profit with current estimates and, actual results once a job is complete. Analyzing these trends can improve future bidding and demonstrate that management is actively evaluating project performance rather than simply reporting it.
5. Clean Underbilling and Overbilling Positions
Material underbillings often generate questions. Some result from normal timing differences, but significant or recurring balances may indicate unapproved change orders, collection issues, contract disputes or revenue recognized before it can be billed.
Overbillings can benefit cash flow, but unusually large balances may require explanation. Management should understand material underbilling and overbilling positions and be prepared to provide supporting documentation.
Building Surety Confidence
Contractors seeking to strengthen bonding capacity should make WIP reporting part of their regular project management process. Monthly reviews involving project managers and accounting personnel can keep forecasts current, while consistent cost-to-complete methodologies and detailed change-order tracking improve reliability.
Management should analyze profit fade, investigate significant variances and use completed-job results to improve future estimates. Periodic review by an outside accountant experienced with construction and surety expectations can provide additional perspective and help identify weaknesses in the reporting process.
Sureties do not expect every job to be perfect. They expect the information to be reliable and management to understand what the numbers are saying.
A timely, accurate and well-supported WIP schedule demonstrates financial discipline and operational control. That confidence can support greater bonding capacity, expanded access to project opportunities and stronger relationships with sureties, lenders and project owners.
For contractors, the WIP schedule should not be viewed simply as an accounting requirement. It is a valuable management tool for understanding project performance, identifying problems earlier and demonstrating the financial discipline necessary for long-term growth.
Kaitlyn H. Axenfeld, CPA/CFF, CFE, is an audit partner at Dannible & McKee, LLP, a certified public accounting firm. She has more than 13 years of experience providing audit, review, compilation and advisory services to a wide variety of clients with a focus on the construction industry. For more information on this topic, contact Kaitlyn at kaxenfeld@dmcpas.com or (315) 472-9127. Learn more at dmcpas.com.