The Cost of Letting WIP Go Unmanaged

A business can have strong revenue, a healthy backlog, and profitable projects on paper and still struggle to pay its bills. For many construction companies, manufacturers, and project-based businesses, the source of this disconnect is work in progress, commonly known as WIP.

WIP represents the labor, materials, overhead, and other costs tied to work that hasn’t been completed. Having WIP is a normal part of running a project-based business, but problems arise when it grows without proper oversight, creating a cycle in which production moves forward while billing and cash collections fall behind.

How the WIP Failure Cycle Develops

The cycle often begins before a project even starts. For example, a company might prepare an estimate using incomplete information, unrealistic labor assumptions, or outdated material costs. Once the work begins, actual costs start to exceed the original budget.

Project managers may recognize that the scope has changed, but change orders aren’t documented or approved promptly. Meanwhile, employees continue working and materials continue arriving. The business absorbs those costs even though the additional work hasn’t been added to the customer’s bill.

As production gets ahead of billing, WIP increases and cash becomes tighter. The company may turn to a line of credit, delay vendor payments, or use cash from newer projects to cover costs from older ones. Management then becomes focused on keeping crews busy and bringing in more work, which can make the underlying issue worse.

Without changes to estimating, project management, billing, and reporting, the same pattern repeats from one project to the next.

(Download Video Transcript)

Why Growing Revenue Doesn't Always Improve Cash Flow

Revenue growth can hide WIP problems for a while, since new projects bring in deposits and progress payments that may temporarily cover expenses from existing work. However, the company is relying on future activity to fund work that has already been performed.

This can create a confusing situation for owners. Financial statements may show a profit, but the bank balance doesn’t reflect it. The company has earned revenue, yet much of that value is sitting in unbilled work, receivables, inventory, or costs tied to unfinished projects.

There are several warning signs that indicate a business is caught in this cycle. Cash may decline even as sales grow. Line of credit balances may continue climbing, projects may frequently finish over budget, and gross margins may vary widely. Owners may also see large underbillings or aging WIP balances that remain unresolved month after month.

Breaking the Pattern

Improving WIP management starts with more accurate estimating. Estimates should be built using current labor rates, material costs, production assumptions, and historical project results. Comparing completed projects to their original estimates helps identify where margins are routinely being lost.

Project managers also need timely access to budget and cost information. Waiting until a project is finished to identify an overrun leaves little opportunity to respond. Regular project reviews allow teams to address labor inefficiencies, scope changes, purchasing issues, and billing delays while the work is still underway.

Billing practices also play an important role. Invoices should reflect the work completed and be submitted according to the contract schedule and change orders should be documented quickly rather than waiting until the end of the project, when approvals are harder to obtain.

WIP reports should also be reviewed consistently by both operations and finance. This creates a shared understanding of project performance and helps leaders identify where production, billing, and cash collections are out of alignment.

RELATED CONTENT: BIZ TIP

WHAT IS WORK-IN-PROGRESS (WIP) IN CONSTRUCTION?

OPEN IN NEW WINDOW

Better Information = Better Decisions

Modern accounting, ERP, and project management systems can bring job costs, budgets, billing, labor, and project status into one place, giving leaders a clearer view of whether projects are performing as expected and which jobs require attention.

While technology alone won’t solve WIP problems, accurate and timely information can make them easier to spot. An outside accounting or business advisor can also help evaluate WIP reporting, review project margins, improve forecasting, and identify weaknesses in the company’s financial processes.

Unmanaged WIP is the problem, not WIP itself. Businesses that monitor project performance, address change orders promptly, bill consistently, and connect financial reporting with daily operations are better positioned to turn reported profits into available cash.

If your company regularly experiences cash shortages despite strong revenue or backlog, it may be time to take a closer look at your WIP reports and the processes behind them.

RELATED CONTENT: BIZ TIP

SOLVING COMMON JOB COST ACCOUNTING ISSUES IN CONSTRUCTION

OPEN IN NEW WINDOW

Frequently Asked Questions About WIP