Work-in-Progress (WIP) Basics

Work-in-Progress (WIP) Basics

Presented by Ono & Chen CPAs, LLCMay 29, 2014

Full service CPA firm specializing in assisting clients that work with the WIP Schedule.

Over 95% of our clients are in construction and/or are government contractors.

We believe in educating our clients and working with them to help them get to the next level.

Ono & Chen CPAs, LLC

I. General Accounting Basics and How to Save Money on your CPA

II. Accrual vs. Cash BasisIII. Percentage of Completion Method of

AccountingIV. -- Break Time --V. What is the WIP Schedule?VI. Detailed WIP example

Agenda

Let’s Begin!

Make sure to have the following in place:

Have a dedicated Accountant/Bookkeeper.

Use a CPA or tax preparer that you not only trust, but someone who understands your business and your industry.

Understand the requirements of your financial institution (bank) and insurance company.

General Accounting Basics

What do banks/insurance companies generally look at:

1. Overall Profitability2. Balance Sheet including Working Capital3. Cash Flow4. Distributions to Owners5. Timely Financial Reporting6. Underbillings/Overbillings (WIP)7. Poor Fade (WIP)


Even if you trust your CPA completely, it is important to have a basic understanding of the financial statements:

Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Work-in-Progress Schedule


Taking the following steps should enable you to start saving money

on your CPA bill!

How to Save Money on your CPA

1. Make sure to enter your adjusting journal entries (AJEs) promptly!

2. Don’t make any changes to prior years’ transactions!

3. Make sure to reconcile all bank and credit card accounts monthly!


4. Keep account coding simple!

5. Don’t commingle accounts with your personal accounts!

6. Job costing 101 – All job costs should be coded to a job!


What is the cash basis of accounting?

What is the accrual basis of accounting?

Why is it important?

Cash vs. Accrual Basis

Common accounts on an accrual basis financial statement that you won’t see on a cash basis financial statement

Accounts Receivable Prepaid Expenses Accounts Payable Accrued Expenses Bad Debt Expense

Cash vs. Accrual Basis

What is it?

1. Investopedia definition: An accounting method in which the revenues and expenses of long-term contracts are recognized yearly as a percentage of the work completed during that year.

2. It is a revenue recognition method recognized by Generally Accepted Accounting Principles (GAAP).

Percentage-of-Completion Method of Accounting

What is a long-term contract?

IRC Section 460(f)(1): In general, the term "long-term contract" means any contract for the

manufacture, building, installation, or construction of property if such contract is not

completed within the taxable year in which such contract is entered into.


Why is it important?

1. It is the most accurate way to measure revenues on uncompleted contracts.

2. More importantly, it is probably required by the bank, surety company, and even your friends at the SBA!


The most important schedule in financial statements using the percentage-of-completion method is the work-in-

progress schedule!


-- Break Time --

It is a supplementary schedule within the financial statements of a construction contractor (using the percentage-of-completion method) that shows a financial snapshot of a contractor’s uncompleted contracts at a specified time period.

The WIP schedule may be required by your surety/banks on a monthly, quarterly, semi-annual, or annual basis.

What is the WIP Schedule?

COST DRIVES REVENUES!!

If there’s only one thing you learn from today’s seminar, remember that ..

Current contract price (including change orders)

Total estimated contract cost

Cost incurred to date (from inception)

Billings to date

Key Individual Components of the WIP Schedule

Estimated gross profit on completed contract

Gross profit percentage

Percentage complete

Revenues earned to date

Gross profit to date

Key Formulas of a WIP Schedule

Formula: Current contract price minus total estimated contract

cost.

Example: If you sign a contract for $600,000 and you estimate that your total costs will be $400,000, what is your estimated gross profit?

Estimated Gross Profit

Formula: Current contract price minus total estimated contract

cost.

$600,000 <-> $400,000

Answer: $200,000


Formula: Estimated gross profit divided by current contract price

Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200,000), what is your gross profit percentage?

Gross Profit Percentage

Formula: Estimated gross profit divided by current contract price

$200,000 / $600,000

Answer: 33 1/3%


Formula: Cost incurred to date divided by total estimated

contract cost

Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200,000), if your cost incurred to date is $40,000 on this job, what is your percent complete on this job?

Percent Complete (KEY FORMULA!)

Formula: Cost incurred to date divided by total estimated

contract cost

$40,000 / $400,000

Answer: 10%

Percent Complete (KEY FORMULA!)

Formula: Percent complete times current contract price

Example: Using previous example (contract price of $600,000, cost incurred to date of $40,000, percent complete of 10%), how much of your revenues have you earned to date?

Revenues Earned to Date

Formula: Percent complete times current contract price

$600,000 x 10%

Answer: $60,000

Revenues Earned to Date

Formula: Revenues earned to date minus cost incurred to date

Example: Using previous example (percent complete of 10%, revenues earned to date of $60,000, cost incurred to date of $40,000), what is your gross profit to date?

Gross Profit to Date

Formula: Revenues earned to date minus cost incurred to date

$60,000 <->$40,000

Answer: $20,000

Gross Profit to Date

Ono & Chen Builders secures a job with Hawaii DOT on 10/1/13 with the following values:

◦ Contract signed for $500,000

◦ Project manager expects job will cost $250,000

◦ As of 12/31/13, $50,000 of materials have been purchased for the job

WIP Example #1



Percent Complete as of 12/31/13

Revenues Earned to Date as of 12/31/13

Gross Profit to Date as of 12/31/13

Please calculate the following:

Estimated Gross Profit = $250,000

Gross Profit Percentage = 50%

Percent Complete as of 12/31/13 = 20%

Revenues Earned to Date as of 12/31/13 = $100,000

Gross Profit to Date as of 12/31/13 = $50,000

Answers:

Job costing is extremely important as revenues earned to date are driven by costs. Therefore, it is important that you properly code all your job costs!

Cost Drives Revenues!!

Sometimes referred to as overbillings and underbillings, it is the difference between revenues earned to date and amount billed to date to the customer.

These accounts are balance sheet accounts and are an offset against revenues.◦ Cost in Excess of Billings is an asset◦ Billings in Excess of Cost is a liability

‘Cost in Excess of Billings’ and ‘Billings in Excess of Cost’

Ono & Chen Builders has earned $100,000 of revenues as of 12/31/13 on a sole source contract with Hawaii DOT and has billed Hawaii DOT $50,000 as of 12/31/13.

Ono & Chen Builders has underbilled Hawaii DOT and must record the following journal entry on 12/31/13:◦ DEBIT: Cost in Excess of Billings $50,000◦ CREDIT: Revenues $50,000

Example:

Ono & Chen Builders has earned $100,000 of revenues as of 12/31/13 on a sole source contract with Hawaii DOT but has billed Hawaii DOT $130,000 as of 12/31/13.

Ono & Chen has overbilled Hawaii DOT and must record the following journal entry:◦ DEBIT: Revenues $30,000◦ CREDIT: Billings in Excess of Cost $30,000

Example:

Note: The journal entries for ‘Cost in Excess of Billings’ and ‘Billings in

Excess of Costs’ are very important. These entries directly offset revenues.

Cost in Excess of Billings/Billings in Excess of Costs

WIP Example

1. Calculation errors and missing cells

2. Estimated total cost not adjusted with change orders and other adjustments

3. Incorrect ‘cost in excess’ and ‘billings in excess’ journal entries

Common WIP Errors

Thank you for coming!

Ono & Chen CPAswww.onoandchen.com

Work-in-Progress (WIP) Basics

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