When calculating work in progress (WIP) in construction, you need to determine the percentage of completion (POC) on a project by dividing the actual costs incurred to date by the estimated total project cost so you can see how far along you are.
Once you have the POC, multiply that value (percentage) by the total contract value to get the earned revenue.
Then, finally, you compare that earned revenue to the amount already billed to identify any over or under-billing.
Ie.
Percentage of Completion = (actual costs to date) ÷ (estimated total project cost)
Earned Revenue = (percentage of completion) x (total contract)
WIP is about calculating how much work has been completed on a project compared to the total contract value and reflecting that in your financial reporting.
In this article, we will discuss what the WIP means in construction, how to calculate WIP in detail, and the importance of WIP in construction.
What does WIP mean in construction?
Work in Progress (WIP) is a vital component in construction, tracking the progress of ongoing work and enabling effective budget management.
The WIP report provides a financial summary of completed work that has not yet been invoiced, offering insights into expenditures relative to actual work accomplished.
To determine the work in progress of a construction project, you’ll need to have the fixed price in your contract (contract value) and a budget cost on hand.
The fixed price is needed in calculating the percentage of the total project cost against the budget prepared for the construction.
Additionally, you’ll need the total cost spent on the budgeted item to date (actual cost), as well as the total billed revenue.
Once these numbers are readily available, you can calculate construction work in progress.
Importance of calculating wip in construction
- Invoicing and Billing Accuracy:
WIP calculations help contractors invoice and bill clients accurately, reducing the risk of underbilling or overbilling.
- Overbilling
Overbilling occurs when a contractor charges more for completed work than necessary. Although this may provide a temporary cash flow boost, it can also indicate project delays or create financial strain later on, potentially leaving contractors with unpaid expenses if they cannot secure future financing.
- Underbilling
Underbilling happens when a contractor invoices for less than the value of work completed, leading to negative cash flow and potentially forcing the contractor to self-finance the remaining project costs.
Other importance of calculating WIP in construction are:
- Accurate Financial Reporting:
Calculating WIP helps construction companies accurately report their financial performance, ensuring compliance with accounting standards and regulations.
- Cash Flow Management:
WIP calculations enable contractors to manage cash flow effectively, ensuring they have sufficient funds to complete projects.
- Project Profitability Analysis:
By calculating WIP, contractors can analyze project profitability, identify areas for improvement, and optimize resource allocation.
- Improved Decision-Making:
Accurate WIP calculations provide contractors with reliable data to inform business decisions, such as bidding on new projects or allocating resources.
- Reduced Risk of Financial Disputes:
By maintaining accurate WIP records, contractors can reduce the risk of financial disputes with clients, ensuring smoother project execution.
How to Calculate WIP
- Estimate Projected Costs: Forecasting the total expenses anticipated for project completion.
- Compute the percentage of completion: Divide the actual costs incurred to date by the estimated total costs.
- Determine Earned Revenue: Multiply the percentage of completion by the total estimated revenue.
- Identify Over/Underbilling: Difference between earned revenue and the billed amount minus costs to date.
(Percentage of Work Completed (POC)= actual cost ÷ estimated cost)
- You can then use the percentage of work completed to calculate the earned revenue, multiplying it by the total estimated profit
(Earned Revenue = POC × estimated profit)
(Estimated profit = contract amount – revised estimated costs).
- You can then calculate the over/under billing by subtracting the earned revenue to date from the (total amount billed minus the total cost to date).
(Billed to date – cost to date – earned revenue)
Methods Of Calculating WIP
Three methods are most commonly used to calculate the WIP, and they are:
- Percentage of completion:Track progress using the estimated percent complete to calculate the revised total estimated cost
- Units complete: Compare the number of units completed with the total amount of units budgeted to calculate the percent complete and then use the percent complete to calculate the revised estimate
- Cost-to-finish: Add the total amount spent to date to the estimated cost to fi
For this article, we will focus on the percentage of completion.
- Percentage of completion = (actual costs to date) ÷ (total estimated costs)
The Percentage of completion is then applied to the total estimated revenue to determine earned revenue to date.
Example Calculation:
If a project has a contract value of $2,000,000, $400,000 has been spent to date, and $600,000 billed, with total estimated costs of $1,600,000.
POC = 400,000 ÷ 1,600,000 = 25%
Earned revenue = 25% × 400,000 = $100,000
This means that the project is 25% complete. The earned revenue is $100,000, and the overbilling amount is $100,000.
Leveraging Dutum Expertise for Effective WIP Management
In today’s construction era, WIP is non-negotiable if you seek sustained growth and profitability.
Dutum Construction Limited is among the top construction companies in Nigeria, with a reputation for technical excellence founded on more than 20 years of experience.
An understanding of WIP in construction is essential in ensuring accurate and timely financial reporting, making informed decisions, optimizing cash flow, and improving project profitability.
Leveraging the experience of a construction professional like the experts at Dutum Group, you can ensure that your project meets all financial requirements. Here is why you should choose us:
- Experience: With years of experience in the industry, Dutum Group brings a wealth of knowledge and expertise to every project.
- Quality: Committed to delivering superior quality in every aspect of construction, Dutum Group adheres to the highest standards of craftsmanship and materials.
- Innovation: Constantly pushing the boundaries of innovation, Dutum Group utilizes the latest technologies and techniques to optimize efficiency and minimize environmental impact.
- Customer Satisfaction: Customer satisfaction is paramount at Dutum Group. We prioritize open communication, transparency, and collaboration to ensure that each client’s vision is brought to life seamlessly.
- Exceptional Track Record: Dutum Group has completed numerous landmark projects in Abuja, earning the trust and respect of clients and industry peers alike.
- Dedicated Team: At Dutum Group, we are passionate about what we do, consistently going above and beyond to deliver results that exceed expectations.
- Commitment to Sustainability: Dutum Group is committed to sustainable construction practices, striving to minimize environmental impact and maximize energy efficiency in all its projects
For more information,
You can visit our website @ https://dutumgroup.com.
Or you can email us @
Contact information:
We are located in various parts of Nigeria.
Abuja:
10 Danube Close,
off Danube Crescent
Maitama, Abuja
Phone: +234 805 831 7200
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2 Abisogun Road,
Off Palace Road,
Oniru Estate,
Maroko, Lagos
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Dugbe, Ibadan
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