Contractors who are applying for surety credit should pay close attention to their backlog and the impact it has on their ability to obtain and potentially increase their surety bond credit. The Work in Process Schedule (WIP) is a powerful tool in helping to manage backlog and analyze the profitability of each job at any point in time. Used correctly, the WIP could identify underperforming jobs before they turn into potential problems even before those problems are realized out in the field.
The WIP takes four basic numbers into account to provide this level of detail on a job:
- Current Contract Amount
- Current Amount Billed to Date
- Current Costs Realized to Date
- Current Profit Expectation
The distinction “current” is important, as these numbers can and do change on a daily basis, but accurate accounting of costs and billings will lead to consistent and determinable profits.
A surety company can likewise use the WIP to gauge the strength of a contractor’s backlog and examine individual jobs. The WIP is arguable the most powerful tool an underwriter has in determining how much surety credit to extend to a contractor. A brief glance at this schedule can lead to probing questions on particular jobs, owners and other variables to better understand a contractor’s business. Furthermore, the data extracted from the WIP can be realized on a contractor’s balance sheet using the Percentage-of-Completion method of accounting, which could further increase the capital position of the company.
The “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts” (underbillings) is a line item in the Current Asset section of the balance sheet. This number represents work and costs incurred by a contractor but not yet billed for. The underbillings allow a contractor to show the money that will soon be a receivable.
The “Billings in Exess of Costs and Estimated Earnings on Uncompleted Contracts” (overbillings) is a line item on the Current Liabilities section of a contractor’s balance sheet. This number represents money that a contractor has billed for, but has not yet performed work or experienced any costs for. It is money that the contractor owes on the job.
By accurately accounting for costs and billings on each job, a contractor can use the WIP to better manage each job’s profitability. The WIP allows a contractor to bolster his balance sheet and potentially increase his working capital position. Finally, the WIP allows a surety bond underwriter to better understand a contractor’s business, challenges and successes.