The underwriting process for performance bonds can be a bit of a mystery. A growing contractor will inevitably grow out of the basic underwriting program of its surety and find it needs to increase bond capacity. Migrating from the fast application program, or a basic surety bond program to one that allows for more and bigger bonds will require additional information. One of the items a contractor may be required to provide is a Work In Progress schedule or, in surety underwriter lingo, a WIP Schedule.
The work in progress schedule (WIP) is a more than just a list of all the jobs currently under way. The WIP should include the following information:
The underwriters with the surety companies will be looking to see consistency in these reports. They do not want to see a situation where most of the jobs see profit deteriorate over time. For instance, the original job estimate was a $100,000 profit. At 70% complete the WIP was still showing a $100,000 profit. When the job was completed, it only showed a $50,000 profit. The surety companies refer to this situation as profit fade. If that situation consistently occurs, the surety company will take that into consideration on the bonding limits. The surety will also be looking at over-billings and under-billings.
Over-billings are when a contractor bills in excess of the amount of the contract at any given time. For instance, if the job is actually 50% complete on a cost to cost basis, but the contractor has already billed 60% of the project, then the project is over-billed. This is sometimes refereed to as front end loading the job. The underwriters usually do not mind seeing over-billings so long as there is cash available to complete the work.
Under-billings are just the opposite. When a contractor has not billed for the work already completed. Using the previous example, the job is 50% complete but the contractor has only billed for 40% of the work.
Seeing under-billings on the work in progress schedule may raise a few red flags for the underwriters. Why would a contractor not bill for the work it has done? Often times under-billings reflect change orders that have not been approved. A job that is under-billed when very close to completion is a big red flag. It is quite common in this circumstance to the the job under-billing turn into a loss in profit of that amount.
The work in progress schedule is an important underwriting tool for the surety companies. Proper and accurate job costing is the cornerstone of a successful contractor.