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Get more out of the WIP schedule to improve your construction business

Boston Business Journal
July 11, 2018

Michael Carr, CPA, MSA, MST

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As seen in the Boston Business Journal

The work-in-process (WIP) schedule is one of the most underutilized and underappreciated management reports in construction. Many construction companies use the WIP simply to calculate percentage of completion for revenue recognition purposes, but don’t take it much further than that. The WIP can be a powerful tool to help management make strategic business decisions and get ahead of project issues.

Garbage in, garbage out
The first two steps of getting the most out of your WIP schedule are proper input and proper setup.

  1. The key with input is making sure the costs posted to jobs match how the jobs are being estimated. Without this key connection, the percentage of completion will not calculate properly and you’ll be left with inaccurate information, potentially leading management to make the wrong decisions.
  2. For proper set up, your WIP report should allow you to see trends, track performance, perform a sales analysis, and much more. Often, companies rely on their software system to prepare a WIP schedule and, depending on the system, this could be good or bad. Many systems do not create a very good WIP, nor do they have the additional fields that can really give management good information. If the system has an excel connector or crystal reports, you can start to customize the WIP to get more out of it. The best WIP schedules tend to be in Excel format. Excel lets you customize fields and perform additional analytics which are generally not possible with system-generated reports. Some of the key fields that you want to see on your WIP are: backlog, gross profit spike/fade, change in contract values, change in estimates, and sales analysis metrics. By adding these columns you can really start to dissect your performance on a monthly basis.

Setting up a proper sales analysis
The sales analysis is a great way to start to use the WIP to drive internal and external decisions. It should include all the key metrics driving your jobs’ performance.

For example, some of the key fields that should be added to the WIP for the sales analysis include: customer, project manager, estimator, project type, customer type, and project location. By adding these fields to each job line on the WIP, you can create valuable metrics that can be analyzed monthly, quarterly, and yearly to help drive the decision-making process.

Evaluate the data
Based on the review of your sales analysis, you can answer the following important questions:

  • On which jobs do we perform better or worse?
  • What project manager performs best on certain project types?
  • Which estimator is over or under performing?
  • Are there project types we should be focusing on, or some that we should shy away from?

At a minimum, the company should analyze this data on a yearly basis to develop a sales plan. At the end of the year, you can sort and subtotal by all these different factors to start a grading process. First, grade the key metric on a financial basis from A-F. This should be a fairly easy task, as the financial data is clear and is included in your sales analysis totals.

Next, grade the key metric on an intrinsic basis from A-F. This is a little more difficult, as you have to look at each key metric and decide how to grade each on a non-financial basis. One example is grading a customer. The customer itself may be fairly profitable, and is classified as an “A” client financially, however, they are very hard to deal with, hard on the employees, difficult to get changes through on, etc., so they may be a D or F, from an intrinsic standpoint. Most companies only consider the financial aspect and ignore the impact of intrinsic issues, meaning a client you always thought was an A, could be downgraded due to other factors.

The initial analysis may lead to the following additional questions:

  • Do we really want to work with that client going forward?
  • Do the other factors take people away from doing additional work, or getting new projects?

The sales analysis can bring up some very good, and difficult, discussions. These discussions can drive positive change and increase company performance to get to best-in-class levels.

Remember, in construction, the WIP should be management’s most valuable tool and should not be overlooked.