Asking the right questions about your WIP schedule

As an auditor of companies in the construction industry, I often ask clients about the performance of specific jobs in their contracts schedule, also known as a WIP schedule or Jobs schedule. The job inquiries are designed to uncover potential contract-related accounting issues that should be corrected for adequate and useful financial reporting. These questions can also help managers identify and correct job related issues as they manage jobs during day-to-day operations.

The inquiries are typically made for significant jobs that display the following characteristics:

• Jobs with unusually high underbillings or overbillings.
• Jobs with unusually high or low gross profit percentages.
• Jobs with unusually high gross profit fades or gains.

These may be indicators of issues with the job. Therefore, to help identify some of the potential problems associated with the job, the following questions should be asked:

Underbillings which are either unusually large or late in a job

• Is the profit margin on the job overstated?
• Are there unapproved change orders included in the contract amount?
• Has the underbilling been “cured” in the subsequent months? Jobs that are persistently underbilled are the ones most likely to contain errors.
• Is the project underbilled because it contains costs which really belong to another job?
• Does the large underbilling indicate an administrative or project management issue that needs to be addressed?

Overbillings which are particularly large or late in a job

• Are there phases or pay items which were billed, but the related costs did not get into the accounting system and may need to be accrued?
• Is the profit margin on the job understated – particularly an issue when it’s very late in a job?
• If the job is fully billed, but there are still estimated costs to complete should the budget be updated?
• Does the project show as overbilled because costs have been put into other projects?

Gross profit margin is either higher or lower than normal

• Have costs from one project been posted to another?
• Is there an error in the budget for the job that incorrectly skews the profit margin?
• If there is a pattern to the unusual profits (the same type of work, the same project manager or estimator, etc.)? Should other project profits be reconsidered?

Previously estimated profit margins have changed significantly in the current period (profit fades and gains)

• Have costs from one project been posted to another?
• Is there an error in the budget for the job which incorrectly skews the profit margin?
• If there is a pattern to the unusual profits (the same type of work, the same project manager or estimator, etc.)? Should other project profits be reconsidered?

This is not an all-inclusive list, however, these are basic inquiries that every accountant and manager in the construction industry should be making when analyzing a contracts schedule.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.