What Costs Should Be Included in a Construction WIP Schedule?
The accuracy of a construction WIP schedule depends heavily on the accuracy of estimated total project cost.
A contractor may have perfect billing data and still produce a misleading WIP schedule if the remaining cost to complete the project is incomplete or unrealistic.
A strong cost-to-complete process should consider:
direct labor;
materials;
subcontractors;
equipment;
project-specific overhead;
committed costs;
change orders; and
all remaining costs required to complete the work.
The key question is not simply:
“What have we spent so far?”
It is:
“What will this project actually cost when it is finished?”
Why Estimated Total Cost Matters So Much
For contractors using a cost-based measure of progress, estimated total cost directly affects:
percentage complete;
earned revenue;
expected gross profit;
gross margin;
overbillings;
underbillings; and
financial statement results.
For example:
Costs incurred to date: $1,000,000
Estimated total project cost: $2,000,000
Percentage complete: 50%
But if the actual expected total cost is really $2.4 million, the project is only about:
41.7% complete
That difference can materially change earned revenue and expected profitability.
Start With Direct Labor
Direct labor should generally include the labor required to perform the project.
Depending on the contractor, that may include:
field labor;
foremen;
project-specific supervision;
project management labor;
overtime;
specialized labor;
temporary labor; and
other employees directly supporting the project.
The important issue is consistency between:
estimating
job costing
and
WIP reporting.
If the estimate includes certain labor costs but accounting records them elsewhere, comparisons become less reliable.
Include Labor Burden Where Appropriate
Direct wages may not represent the full cost of labor.
Depending on the contractor's accounting policies and estimating methodology, labor burden may include:
payroll taxes;
workers' compensation;
employee benefits;
union benefits;
insurance;
retirement contributions; and
other payroll-related costs.
If the estimate assumes burdened labor, the cost-to-complete process should generally use a compatible approach.
Otherwise, project margins can be overstated.
Review Remaining Labor Hours
Historical labor cost tells management what has already happened.
The WIP schedule also needs a realistic estimate of the labor still required.
For example:
Original estimated labor hours: 5,000
Hours used to date: 3,500
Project physically complete: 55%
If only 1,500 hours remain in the estimate, management should challenge that assumption.
The project may require more labor than originally expected.
That is often one of the earliest signs of margin fade.
Include Materials
Material cost estimates should include materials already purchased as well as materials still required to finish the project.
That may include:
primary construction materials;
consumables;
freight;
delivery;
storage;
taxes;
waste;
escalation;
and other acquisition costs where applicable.
Management should also consider whether material pricing is:
fixed;
quoted;
purchased;
subject to escalation; or
still exposed to market changes.
A stale material estimate can distort projected gross margin.
Don't Ignore Material Commitments
A cost may not yet appear in the general ledger but still be economically committed.
For example:
A contractor may have issued a $400,000 purchase order.
Only $100,000 has been invoiced.
Looking only at recorded cost would miss the remaining $300,000 commitment.
The cost-to-complete process should capture that obligation.
Include Subcontractors
Subcontractor cost should generally reflect:
original subcontract value;
approved subcontract changes;
invoices received;
remaining commitment;
retainage;
pending changes; and
expected additional cost.
Subcontractor problems can create large WIP errors if management assumes the original commitment will remain unchanged despite project conditions.
Review Subcontractor Change Exposure
A subcontract may increase because of:
scope changes;
schedule extensions;
design changes;
unforeseen conditions;
labor or material escalation;
disputed work; or
replacement subcontractors.
Those expected increases should be evaluated before they appear as final invoices.
Waiting until the invoice arrives can cause margin fade to appear too late.
Include Equipment Costs
Equipment may represent a significant project cost.
Depending on the contractor's costing methodology, that may include:
owned-equipment usage;
equipment rental;
fuel;
maintenance;
mobilization;
demobilization;
operators;
repairs; and
transportation.
The cost-to-complete estimate should reflect how long equipment will remain on the project and whether the schedule has changed.
A delay that extends equipment rental by two months can materially affect project margin.
Consider Project-Specific Overhead
Some costs do not fit neatly into labor, materials, or subcontractors but are clearly associated with a specific project.
Examples may include:
site supervision;
temporary facilities;
trailers;
utilities;
security;
permits;
project insurance;
testing;
small tools;
travel;
lodging;
project administration; and
closeout costs.
Whether these costs belong in estimated project cost depends on the contractor's accounting policies and reporting framework.
The key is consistency and completeness.
Distinguish Project Costs From Company Overhead
Not every company expense should be pushed into individual jobs.
General company overhead may include:
executive compensation;
corporate office rent;
general accounting;
company-wide software;
marketing;
business development; and
administrative costs.
Contractors should have a clear policy for distinguishing:
project-specific cost
from
general company overhead.
Inconsistent allocation can distort both job margins and company-level profitability.
Include Committed Costs
Committed costs are one of the most important inputs in a reliable WIP process.
They may include:
open purchase orders;
subcontract balances;
signed commitments;
equipment orders;
material orders; and
other obligations not yet fully recorded.
For example:
Actual cost to date: $2.0 million
Open commitments: $1.1 million
Expected additional uncommitted cost: $500,000
Estimated total project cost should not be treated as $2 million.
The remaining commitments matter.
Include Expected Costs That Are Not Yet Committed
Committed cost alone is also not enough.
Some remaining work may not yet have a purchase order, subcontract, or invoice.
Management still needs to estimate:
remaining self-performed labor;
future materials;
unresolved subcontract scope;
closeout work;
punch-list items;
warranty-related effort;
demobilization; and
other costs required to finish.
This is why cost-to-complete requires management judgment—not just an accounting-system export.
Evaluate Change Orders on Both Sides
Change orders can affect:
contract value
and
estimated cost.
A common mistake is increasing expected revenue for an approved change order without fully updating the related cost estimate.
For example:
Approved change order: $250,000
Expected additional cost: $200,000
The contractor should not simply add $250,000 to revenue and leave estimated total cost unchanged.
That would overstate expected project margin.
Pending Change Orders Require Careful Analysis
Pending change orders can be even more complex.
Management should understand:
whether work has been performed;
cost incurred to date;
remaining expected cost;
amount requested from the customer;
approval status;
likelihood of recovery; and
timing.
Even if the accounting treatment of revenue is still being evaluated, the underlying cost exposure should not be ignored.
Include Rework
Rework is often missed because it gets absorbed into normal labor and material accounts.
Potential rework costs include:
additional labor;
replacement materials;
subcontractor corrections;
equipment;
supervision;
inspection;
delay-related costs; and
other corrective work.
If management knows rework will be required, it should be reflected in the forecasted cost to complete.
Include Delay-Related Costs
Schedule delays can create additional costs even when the original scope has not changed.
Examples include:
extended supervision;
field office costs;
equipment rental;
temporary facilities;
labor inefficiencies;
overtime;
storage;
subcontractor escalation; and
remobilization.
A project that takes 14 months instead of 10 months may have materially different economics.
Don't Forget Closeout Costs
Projects nearing completion can sometimes appear more profitable than they really are because management underestimates the final effort required.
Remaining costs may include:
punch-list labor;
cleanup;
inspections;
commissioning;
documentation;
final subcontractor work;
demobilization;
warranty setup;
final permits; and
administrative closeout.
Small costs across many categories can add up.
Look for Costs Recorded Outside the Job
Some project costs may be hiding elsewhere in the accounting system.
Examples include:
credit cards;
suspense accounts;
general overhead;
uncoded invoices;
payroll clearing accounts;
inventory;
equipment accounts; and
corporate expense categories.
Before finalizing WIP, accounting should review whether material project costs have been omitted from the job ledger.
Reconcile Job Cost to the General Ledger
The job-cost system should reconcile to the accounting records.
Differences may indicate:
uncoded costs;
incorrect jobs;
timing issues;
duplicate entries;
missing expenses;
integration errors; or
manual spreadsheet adjustments.
If the WIP schedule is built from incomplete job-cost data, the resulting revenue and margin may be unreliable.
Project Managers Should Own the Forecast Too
Accounting can report historical cost.
Project managers often have the best information about remaining cost.
A strong cost-to-complete process should combine both.
Accounting may provide:
actual cost;
commitments;
invoices;
payroll;
contract data; and
general-ledger reconciliation.
Project management may provide:
remaining labor;
production expectations;
material needs;
project risks;
change-order status;
schedule impacts;
subcontractor issues; and
operational forecasts.
WIP works best when finance and operations meet in the middle.
Use Forecast at Completion
One of the strongest project-management views is:
Original Budget
vs.
Actual + Committed Cost
vs.
Forecast at Completion
That tells management much more than actual cost alone.
Challenge Significant Variances
When the forecast changes materially, management should ask:
What changed?
Was the original estimate wrong?
Has productivity deteriorated?
Are material costs increasing?
Are new commitments missing?
Did project scope change?
Are change orders incomplete?
Has the schedule moved?
Is there rework?
Are closeout costs understated?
A revised cost estimate should have an operational explanation.
Common WIP Cost Estimate Mistakes
Common problems include:
relying only on recorded costs;
ignoring open commitments;
failing to update labor hours;
carrying old subcontract values forward;
missing material escalation;
excluding project-specific overhead;
failing to account for change-order cost;
ignoring rework;
forgetting delay-related costs;
understating closeout effort;
failing to reconcile job cost to the general ledger; and
letting accounting estimate remaining cost without project-team input.
Each can overstate expected margin.
Why Incomplete Cost Estimates Can Overstate Profit
Suppose a contractor has:
Contract value: $5 million
Original estimated total cost: $4 million
Expected gross profit: $1 million
Expected margin: 20%
Now assume the WIP estimate fails to include:
Additional labor: $150,000
Subcontract changes: $100,000
Extended equipment: $50,000
Closeout and rework: $75,000
Total omitted cost: $375,000
Actual expected total cost is therefore:
$4.375 million
Expected gross profit drops to:
$625,000
Expected gross margin falls to:
12.5%
The project did not become less profitable when the spreadsheet was corrected.
It was already less profitable.
The incomplete cost estimate simply hid it.
Review Costs Monthly
For many active contractors, estimated total cost should be revisited as part of the monthly WIP process.
Larger, higher-risk, or rapidly changing projects may need more frequent operational forecasting.
The goal is to update the financial forecast as soon as management becomes aware that project conditions have changed.
Related Resource: How Often Should Contractors Update Their WIP Schedule? →
The Bottom Line
A construction WIP schedule is only as reliable as the estimated cost behind it.
Contractors should evaluate all meaningful costs required to complete the project, including:
labor
labor burden
materials
subcontractors
equipment
project-specific overhead
committed costs
change-order costs
rework
delay-related costs
closeout
and
other remaining obligations.
The most important question is not:
“How much have we spent?”
It is:
“What will this job cost when we are done?”
A realistic answer produces better WIP, better margin reporting, better forecasts, and better decisions.
How Bilotta & Company Can Help
Bilotta & Company, CPAs, LLC works with construction contractors on WIP reporting, job costing, financial statement assurance, accounting, tax, cash-flow forecasting, and financial leadership.
Through our Contractor Compass® Financial Stewardship program, we help contractors build recurring processes around:
actual costs
committed costs
cost to complete
project margins
WIP
cash flow
and
forecasting.
Our Financial Stewardship as a Service® rhythm is:
Close → Analyze → Forecast → Decide.
A complete cost-to-complete estimate is what allows WIP to move from historical accounting into useful financial forecasting.
Related Resource: What Is a Construction WIP Schedule? →
Related Resource: How Can Contractors Improve Job Costing? →
Related Resource: What Causes Job Margins to Fade? →
Visit the Construction Contractor Financial Resource Center →
This article is provided for general educational purposes and should not be considered accounting, tax, legal, bonding, lending, estimating, or financial advice for a specific contractor or construction contract.