If a construction company pursues public works projects, the company will need to have a relationship with a surety to obtain performance and payment bonds. One of the items that the surety will request as part of the regular financial reporting is a work in progress schedule. This is an important underwriting tool and one that every contractor needs to understand to have a successful construction bond relationship.
Work in progress schedule
The Work in Progress schedule (WIP) is the open job part of the Open and Closed Job Schedules. This is a significant underwriting tool for the performance bond underwriters the surety. Below is a simple example of a WIP:
||Total Contract Price
||Contract Billings to Date
||Estimated Cost at Completion
||Contract Costs To Date
||Estimated Costs To Complete
||Earned Profit To Date
The work in progress schedule, in conjunction with the Closed Job Schedule, are necessary components in the preparation of a construction contractor’s financial statements on a percentage of completion basis, as required by the surety industry. This schedule, in addition to being necessary to calculate earned profit to date on a project, it is also used to calculate Overbillings and Underbillings. Both of these are necessary entries on the balance sheet of a construction contractor. In addition to these, the surety industry will use the Work in Progress schedule (and closed job schedule) to monitor instances of profit fade. The surety may required the work in progress schedule independent of the financial statements as well as Estimated Cost to Complete (Column 6 above) is what the surety considers the construction backlog.
Earned Profit to date is calculated on a Cost to Cost Basis
Column 7 in the above table is the Earned Profit to Date on all the open jobs. It is calculated based on the percentage of the job that is completed on a cost to cost basis. For instance, if a contractor had a 100,000 project with total estimated costs of 80,000 and total cost to date of 20,000, the earned profit to date on that project would be $5,000. The $20,000 cost to date is 25% of the total estimated cost and $5k is 25% of the total estimated profit on the job. The total of column 7 on the work in progress schedule represents the profit earned on uncompleted projects. That number. minus any profit earned on the open jobs from prior periods, is a necessity to accurately calculate overall profitability.
Column 2 is the total estimated contract price including approved change orders.
Column 3 is the total amount of the project that the contractor has billed the owner as of the specific date.
Column 4 is the estimated total cost of the project at completion. There can be some subjectivity to this number. When in doubt, stay conservative.
Column 5 is the actual contract costs to date as of the date of the work in progress schedule
Column 6 is simply column 4 less column 5. This is the number most sureties use to calculate backlog as it relates to construction bonding program.
The work in progress schedule is one of the most important items for the performance bond underwriting process. the surety underwriters will spend a great deal of time analyzing the schedule in detail and it will likely be the source of many underwiring questions. As such, it is important that a construction contractor understand this schedule and provide accurate information.
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