As a residential builder or remodeler, you don’t wait until a home is finished to pay for lumber, labor, or subs. So why would you wait until the end of a project to know if you’re actually making money?
That’s where Work in Progress (WIP) accounting comes in.
It’s a fairly nuanced but critical method of tracking the financial health of your projects while they are still in progress. A WIP report is a snapshot that answers the most important questions for any job:
How much have we spent?
How much have we billed?
How far along are we?
Are we actually making the profit we planned?
Why the WIP Report is an Important Tool
For a homebuilder, a regular WIP report is more than just accounting, it’s your project-by-project financial command center.
See Your True Profit: It shows you the profit you’ve earned to date, not just the cash you’ve collected.
Spot Problems Early: You can immediately see if costs are running higher than your estimate. This lets you fix a problem in week 3, not after it’s too late.
Manage Cash Flow: It shows if you’re billing enough to cover your costs (see “over/under billing” below).
Get Accurate Financials: Lenders and bonding agents love WIP reports because they show the true financial health of your jobs/company, not just the cash in the bank. Also, builders who don’t make this critical WIP adjustment are almost always overpaying their income taxes because they’re reporting more profit than they’ve actually earned. This creates a vicious cycle of cash and profitability issues!
Think of your WIP report as one line for each job. Here are the main columns you need:
Total Contract Price or “Expected Revenue at Completion”: The total price the homeowner is paying you, including all approved change orders.
Total Estimated Cost or “Expected Cost at Completion”: Your total budget for the entire job (labor, materials, subs, everything).
Total Estimated Profit: or “Expected Gross Profit”: The difference between #1 and #2. This is what you hope to make.
Costs to Date: The actual amount of money you have spent on the job so far (needs to be accrual basis!)
Billed to Date: The total amount you have invoiced the customer so far.
These five numbers are all you need to calculate WIP and the most critical metrics to project’s financial status.
This is the key calculation that tells you if your billing is in sync with your work. It’s a three-step process.
Let’s use an example:
Total Contract Price: $500,000 (what you expect to get paid for when all the dust settles)
Total Estimated Cost: $400,000 (what you expect the project to cost when you)
Costs to Date: $100,000 (what you’ve spent so far)
This shows how far along the job is, based on your spending.
Formula:
Percent Complete = Costs to Date / Total Estimated CostExample:
$100,000 (Costs) / $400,000 (Estimate) = 0.25or 25% complete
This shows how much of the contract price you have earned based on your progress.
Formula:
Earned Revenue = Total Contract Price × Percent CompleteExample:
$500,000 (Contract) × 25% (Complete) = $125,000
Formula:
Earned Profit = Earned Revenue - Accrued Costs
Example:
$125,000 (Earned Revenue) - $100,000 (Accrued Costs) = $25,000This means you have officially earned $125,000 of the revenue, no matter what you’ve billed. This translates to $25,000 of earned profit . Think of earned profit as money that is available for paying overhead, loan principle, owner’s draws, or anything else non-job related.
Now, compare what you’ve earned to what you’ve billed.
Formula:
Over/Under Billing = Billed to Date - Earned Revenue
Let’s look at two different scenarios for your project:
Scenario A: You are UNDERBILLED
You have billed the homeowner $80,000 so far.
Calculation: $80,000 (Billed) - $125,000 (Earned) = -$45,000
What this means: You are underbilled by $45,000. You’ve done $45,000 worth of work that you haven’t invoiced for yet. This is bad for your cash flow—you’re funding the project out of your own pocket.
Scenario B: You are OVERBILLED
You have billed the homeowner $150,000 so far (e.g., you collected a large deposit).
Calculation: $150,000 (Billed) - $125,000 (Earned) = +$25,000
What this means: You are overbilled by $25,000. You’ve collected more money than the work you’ve completed. This is good for your cash flow. Technically this $25k shows as a liability in your financial statements because you still owe the client $25,000 worth of work.
Your goal is to stay overbilled. As a rule of thumb for healthy cashflow (but not overdoing it and causing eyebrow raises from your clients), we like to see overbilling around 20%, i.e. you’ve billed $120k on $100k of earned revenue.
Bad Estimates: Your entire WIP report relies on your “Total Estimated Cost.” If that number is a bad guess, your report is useless.
Not Tracking Change Orders: When a homeowner adds a feature, you must update both the Total Contract Price and the Total Estimated Cost.
Inaccurate “Costs to Date”: You must capture every cost. A missing subcontractor bill throws off your numbers.
Not Doing It: Waiting until the end of a 6-month build to see if you made money is how you go out of business and botch your tax returns. Run your WIP report at least monthly to stay in control.
Use Software to Automate your Cost Collection: If your costs aren’t recorded in real-time, your WIP reports will alway be lagging. Use Controllr to automate cost collection and keep those job actuals tight and current.
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