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Finding the Degree of Completion
When analyzing the financial condition of construction companies, the Work in Process schedule is always a required item.
Much of this evaluation keys into the degree or percentage of completion of each project. When you read a WIP schedule there may be no column heading for this number, but it is easy to calculate. Noteworthy: There are some inaccurate ways to determine this percentage, so you will want to figure it yourself in any event.
Formula to find the % of Completion:
Divide the Costs Incurred to Date into the Total Costs to Complete. The percentage of the total costs that have been incurred so far is the degree of completion for that project. If the Total Costs to Complete are not shown, you may need to add the Costs Incurred to Date to the Remaining Costs in order to find the Total Costs. The degree of completion is based on a cost analysis because until you incur your last cost, you are not finished – regardless of the status of the billings.
Common misconceptions about the % of completion:
1. The % of completion is based on the degree of Billings. (No, it is based on an analysis of the costs.)
2. It is always based on the original contract amount. (No, the Current Revised contract amount is used if a plus or minus change occurred.)
3. It is based on the original estimate of total costs. (Incorrect, the Current Revised Estimate of Total Costs is always used.)
With all this in mind, what is the degree of completion on this contract?
Contract Price / Original % GP / Billed / Costs to Date / Remaining Costs
$1,100,000 / 10% /$550,000 / $350,000 / $700,000
Raise your hand if you got 50%.
OK, that’s wrong… The typical short WIP schedule doesn’t show everything. It may not give you the Current Estimate of TOTAL Costs. First, you must find that.
So $350,000 + $700,000 = $1,050,000 Current Estimate of Total Costs
350,000 / 1,050,000 = .333 or 33.3% Did I hear someone say “Why didn’t I pay more attention in math class?!”
So the project is 33% complete based on the portion of the total costs that have been incurred so far.
Knowing the percentage of completion is important for a number of reasons. From a project management viewpoint, it is normal for the contractor to establish a projected timetable to assure on-time completion of the project. By periodically reviewing the degree of completion, the project manager can confirm they are on track. There may be financial rewards for early completion or a punishment, “liquidated damages,” if they’re late.
There are other important uses for the % of completion. We’ll go over them in the next segment… with the haunting title: “3 of 4!”
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Steve Golia, Marketing Mgr.: 856-304-7348
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