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WIP Schedule, Effect on Balance Sheet Analysis
Now we pull it all together.
Here again is our sample contract.
Contract Price / Original % GP / Billed / Costs to Date / Remaining Costs
$1,100,000 / 10% /$550,000 / $350,000 / $700,000
What did we determine so far?
- We found that the job is 33% complete.
- The profit % has slipped from 10% to 4.5%
- The contract is Overbilled by $187,000
In addition to generating some discussion (What’s going on with this project?), these facts have an effect on the financial analysis and bond worthiness of the account. They could result in the bonding line being reduced and future bonds being declined.
How does this happen?
Remember the Overbillings are dollars the contractor has in hand, but at this stage of the project they are undeserved. The dollars are comprised of costs and profits, and the profits are unearned at this point.
So where are these “undeserved funds” on the balance sheet? There is no entry by that name on the Balance Sheet. These dollars are sitting in the cash account, along with other cash owned by the company. These dollars are not yet earned or deserved, yet they are sitting in the account looking normal.
The solution is to reconcile (recognize) the undeserved funds by creating a corresponding liability that offsets the Overbilling cash asset. This Current Liability will be called Billings in Excess of Costs and Estimated Earnings. In short, this is referred to as Overbillings.
In this case, there will be a $187,000 Overbilling Current Liability to offset the undeserved funds in the cash account (Current Asset). This removes the extent to which the Overbillings inflated the Working Capital calculation (Current Assets minus Current Liabilities).
In an Underbilled situation, a Current Asset called “Costs and Estimated Earnings in Excess of Billings” would appear. (Notice that it sounds like the opposite of the Overbilling title.) This adds to Working Capital by reflecting the earned funds that have not been collected because the billings are not current.
Here are some CPA comments regarding WIP schedules and their importance:
Conclusion: The analysis described in this series is critically important for contractors and their surety. However, the analysis is impossible if the contractor does not keep valid records of the costs attributed to each individual project and then periodically re-estimate the Remaining Costs to Complete based on the actual realities experienced.
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