Contractor WIP Series: Common Errors That Distort Margins
Contractors do not need another accounting report they cannot use.
They need to know what they earned, what it cost to earn it, where each project is headed, and whether today’s cash is masking tomorrow’s problem.
That is what a properly prepared work-in-process schedule can reveal.
This five-part series breaks down WIP accounting in practical terms, from revenue recognition and overbillings to cost allocation and the mistakes that distort job margins.
Part Four.
A polished spreadsheet is not necessarily an accurate WIP schedule.
Here are several recurring errors that can materially distort revenue, gross profit, working capital, and project performance.
1. Including pass-through taxes in both contract value and billings
Certain sales and similar taxes collected from a customer and remitted to a governmental authority may need to be excluded from revenue, depending on the facts and the company’s applicable accounting policy.
If the tax is excluded from the transaction price but included in billings, or included inconsistently between the contract price and billed-to-date columns, the resulting overbilling or underbilling calculation will be wrong.
For example:
Construction contract: $1,000,000
Pass-through tax: $100,000
Customer invoice total: $1,100,000
If the WIP uses a $1 million transaction price but reports $1.1 million as project billings without removing the tax, it may create a false $100,000 overbilling.
The treatment must be consistent throughout the schedule and agree with the general ledger.
2. Recording revenue from invoices instead of project progress
Invoices do not establish how much revenue has been earned.
When invoice amounts are posted directly to revenue without a WIP adjustment, revenue and gross profit become functions of billing timing. This is particularly misleading when billing schedules are front-loaded, milestone-based, delayed, or affected by retainage.
3. Failing to allocate job costs
Labor, equipment, purchasing, subcontractor, and other project-related costs are sometimes left in overhead or selling, general, and administrative accounts because they were not coded to individual jobs.
The affected jobs then appear more profitable than they really are.
Management may respond by:
Underpricing similar work
Paying incentives based on overstated margins
Misjudging project manager performance
Accepting risks the apparent margin cannot support
Continuing work in a market or service line that is not actually profitable
4. Leaving construction related costs in SG&A
The classification of costs should reflect what they actually support.
Costs attributable to contract performance or construction operations may need to be included in construction costs rather than left entirely in SG&A. Depending on the company, this may include appropriate portions of:
Field supervision
Project management
Construction payroll burden
Equipment and vehicle costs
Insurance
Occupancy and facilities costs
Technology supporting project delivery
Quality control
Safety functions
Other fixed or variable construction-support costs
This does not mean every administrative expense should be pushed into jobs. The allocation method should be reasonable, supportable, consistently applied, and based on the nature of the cost.
But when costs necessary to deliver construction work remain buried in SG&A, gross margin is overstated.
5. Using stale estimated costs
A job may still show the original budget months after operations knows that labor, materials, subcontractor, or schedule assumptions have changed.
An outdated estimate can accelerate too much revenue, hide margin fade, and delay recognition of an expected loss.
6. Ignoring loss contracts
If the latest project estimate indicates that total expected costs will exceed the transaction price, the expected loss may need to be recognized immediately rather than gradually as the project progresses.
Waiting until the project is complete can materially overstate current assets, income, and equity.
7. Including costs that do not reflect performance
The cost-to-cost method should measure progress toward satisfying the performance obligation.
Plain vanilla uninstalled materials, significant inefficiencies, wasted labor, mobilization items, or other unusual costs may require special consideration. Automatically treating every dollar posted to a job as equal progress can overstate the percentage complete.
8. Using unsigned change orders without evaluating enforceability
Potential change orders may be economically real, but including the full amount in contract price before approval or enforceability is sufficiently supported can overstate revenue and projected profit.
Change-order tracking should distinguish between:
Approved changes
Pending changes
Disputed changes
Internal exposure not yet submitted
Amounts excluded from the accounting transaction price
The goal is not artificial conservatism. It is a supportable estimate.
Let’s Connect
Is your WIP schedule helping you operate, or is it only being updated for year-end reporting?
Bilotta & Company’s Contractor Compass® helps construction companies connect job costing, WIP, cash flow, forecasting, and financial reporting into one consistent operating rhythm.
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