One thing that seems to be a hot button issue and top of mind for all construction financial professionals (CFPs) is the work-in-progress (WIP). Arguably, it’s the most important part of your financial statements.

The concept is straightforward, and once you have prepared a couple of reports yourself, the process and accounting become second nature; however, this document is highly dependent on gathering information from those in your company who are not financial professionals.

CFPs must assess how their company operates and how they can get the most accurate and up-to-date information to prepare an accurate WIP. Every company has different obstacles that stand in their way based on their unique set of circumstances. And often, construction financial professionals lean on each other to share their processes and experiences to help each other to come up with ideas for their organization.

This article shares the experiences of a few experienced professionals and dives into what they do at their organizations. 

Thank you to the following professionals for sharing their perspectives:

• John Bieber, CPA, CCIFP, CFO at National Glass & Metal Co., Inc.
• Carrie L. Dotson, CPA, CCIFP, Construction Systems Inc.
• Mike Megara, MBA, Weifield Group Contracting

Do you sit down and review interpretations of the data with project managers? What would they say are the benefits to the financial team and the overall company for doing these reviews accurately throughout the job?  

Carrie: The president, accounts receivable associate, and I all meet with each project manager (PM) via Microsoft Teams once per month to review their WIP status sheet and accounts receivable report.

At that time, the components of each job are discussed, especially:

• Updating the reasonableness of revised estimated costs.
• Revising the contract amount — Have all change orders been submitted?
• Billing to date — Does this match what the PM submitted?
• Costs to date, which highlight any cost transfers that need to be made, misclassifications, and labor overages.
• Over/under billings in an attempt to better manage cash flow.
• Reviewing the billing and estimated gross profit margins, which are often a reality check, as there is a range of acceptable margins within the local industry. These margins tend to vary by division (e.g., interiors, contractor materials, doors and hardware) and job type (self-performing vs. using labor subcontractors).

Of course, some PMs understand the purpose of accurate estimates better than others. I try to explain how revenue recognition works and dramatic swings can wreak havoc on the financial reporting. 

Mike: As a multi-entry company across multiple regions, the financial team sits down with the regional managers monthly to review the WIP and adjust prior to assembling financials for the bank/bonding and shareholders.

The expectation is that the general managers in each region will review this with project executives prior to our review and then that flows down from there. Our goal is to get the most accurate forecasts and identify opportunities or issues to limit risk.

We also post a “wall of fame,” which is the top projects/teams, so we can have healthy competition to promote accuracy of data and cash flow.

The benefits of the reviews and friendly competition appear in the business through increased cash flow by reduction in DSO, reduced underbilling, increased overbilling, margin gains, and effective reduction or understanding of margin fades.

In general, when forecasts are accurate, the financial and operational teams are more collaborative on betterments instead of fixing items.  

Do you feel your team has a good understanding of the value of submitting and how this data is used? 

Mike: The operations team, based on seniority and experience levels, has varying understanding in the value of submitting timely and accurate information and how it is used. It is an ongoing process to educate and explain the why in the organization.

Higher level managers are accountable for reviewing individual projects after projections and departmental WIPs — so they have the best understanding but sometimes lack the deep knowledge to cascade this throughout the organization. We have had to focus on financial literacy classes so all members of the operational team down to the apprentices understand the impact they have on the company.

We dive into business finances with managers that extend past the project constructability and focus on productivity and planning with lower levels. Having more integrated systems with better/real time visibility has helped recently with the accuracy and management of the data.

What are some things you have done to get them to this point in understanding?  

Mike: We use targeted training so people understand the business and not just what we build; systems to provide transparency in data to allow for decision-making; and a lot of mentoring to get the information and knowledge to flow down from the experienced generation to the new, up and coming generations.

John: After a few monthly meetings, I was able to get most of our PMs to attend a CFMA meeting with me, which was designed specifically to educate PMs on the financial side of the construction business, with extra focus on the mechanics of the CIP. That included demonstrating how being either overly optimistic or sandbagging (holding back on recognizing realized budget improvements) results in a poor track record and hurts credibility with all users of the financial statement, including your bank and surety.

In our monthly meetings, we continually stress with our PMs what to be considering when doing the projections and making it very clear that we keep track of the overall monthly movement of projected gross profit percentage on their jobs.

At those meetings, we also review all outstanding change order requests and push to have those followed up on just as much as a billed receivable.

Any parting words of wisdom to share with your peers?

John: I think step one should be just establishing a great rapport with your PMs. Like those of us in the financial world, their jobs are stressful, and there are never enough hours in the day to keep everyone happy, namely their counterpart at the GC and architects, along with fellow employees.

When I started at National Glass 13 years ago as CFO, one of my first directives to my accounting team was to help others in the company any way you can, provided you’re not up against a serious deadline.

As with any vital effort in this industry, priority has to be established at the top. Without that appreciation of the role financial management plays in a successful construction company, it will never be a priority for most PMs.

Also watch out for what I call the black hole in the projection process, which is when a PM knows something has been delivered to a jobsite as of your cost cutoff date so accordingly assumes the corresponding invoice is included the cost-to-date figure. Establishing a solid purchase order system and process and reviewing open commitment reports can be a great help in avoiding this black hole.

And my last piece of advice on this topic would be to always be skeptical, and when it looks too good to be true, don’t just accept the “win.” Dig in until your team is satisfied that the pickup is real. Additionally, carefully discuss labor cost codes that have overrun budgets to make sure the projected profit fade has been captured in full, and of course, what can be done about it.

Conclusion

There is a universal theme of the importance of communication and education. Understandably, this is easier said than done with differing levels of experience and knowledge in your company, but it is our hope that this provided you with some ideas to improve your process.