What Does a Work in Progress Report Tell a Construction Business Owner?

Start with the jobs that have changed since the last review. Look at the current contract amount, including approved change orders, and compare the latest estimated total cost with the original estimate. Then check how much has been spent and billed so far.

You don’t need to build the report yourself to ask good questions about it:

A WIP report depends on more than costs already posted. It also needs a realistic estimate of what remains to complete each job.

Imagine a $500,000 contract with $300,000 of costs incurred and an estimated $100,000 left to spend. The projected total job cost is $400,000, leaving $100,000 in expected gross profit before company overhead. After a site review, the team realizes the remaining work will cost $145,000. Expected gross profit falls to $55,000, even though the contract price and money already spent haven’t changed.

If the report still uses the old estimate, the owner may make decisions based on $45,000 of profit the job is no longer expected to earn. This example illustrates a job forecast, not a tax calculation.

That’s why the person managing the project needs to be part of the financial review. The bookkeeper can record costs, but the field team often knows first when the cost to finish has changed. Valor’s construction bookkeeping guidance explains how current job costs support more useful tax planning. A separate bookkeeper maintains the records; Dan uses those records for tax review and planning.

A WIP schedule can show the gap between revenue reflected as earned on the report and the amount billed to the customer. These differences are often called overbilling and underbilling. The IRS’s construction industry audit guide illustrates these categories as billings in excess of costs and estimated earnings, and costs and estimated earnings in excess of billings.

Overbilling means the amount billed is ahead of revenue reflected as earned on the schedule. That may fit the payment terms, but you still need to understand how much work and cost remain. Cash collected on that job may be needed to finish it. An invoice alone doesn’t mean the customer has paid.

Underbilling means revenue reflected as earned is ahead of the amount billed. Ask why. Has the team missed a billing milestone? Is a change order awaiting approval? Is there a dispute over completed work?

Neither label tells the whole story by itself. Review the contract terms, job status, invoices, retainage, and expected collection dates before drawing conclusions. A WIP schedule and a cash forecast answer different questions, so review them together.

An updated WIP report gives a CPA better context for projected profit and jobs that may cross into another tax year. It can reveal that a job’s expected margin has fallen, that significant costs haven’t been assigned correctly, or that the owner’s cash forecast depends on payments that haven’t arrived.

The report doesn’t, by itself, decide how income is reported on a tax return. Tax treatment depends on the company’s accounting method and the facts of its contracts. The IRS’s accounting methods guidance explains when income and expenses are reported and points to separate rules for long-term contracts. Your CPA should review the rules that apply to each contract and tax year before turning a job projection into a tax estimate.

For a Kansas City-area contractor with several jobs underway, that conversation is more productive when the CPA can see current contract values, realistic costs to finish, billing, and expected payment timing. It’s also easier to discuss tax estimates and cash reserves before the year closes.

Bring the latest WIP schedule and be ready to explain the jobs with the biggest changes. Your review packet should include:

A WIP report earns its place in the meeting when it helps you answer three questions early: Which jobs changed? What cash is still needed to finish them? What does the updated profit picture mean for the months ahead?

Valor Business & Tax Services works with Kansas City-area contractors on year-round tax planning tied to jobs, crews, equipment, and cash flow. If your open projects have changed the financial picture, request a contractor tax strategy session with Dan Marlow to review what needs attention next.