Presented by Ono & Chen CPA’s, LLC
August 1
2013
1,2013
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

Full service CPA firm specializing in the
construction industry.
Over 90% off our clients
l
are in construction
and/or are government contractors.
We believe in educating our clients and
working with our clients to provide ONLY the
services you need.
I.
II.
III
III.
IV
IV.
V.
VI
VI.
Understanding the Percentage-ofCompletion Method of Accounting
Acco nting
Defining the WIP Schedule
Key Components/Formulas of the WIP
Schedule
*Break*
Break
Detailed WIP Schedule Examples
Common WIP Schedule Errors &
Surety/Bank Considerations
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Investopedia definition: An accounting
method in which the revenues and
expenses of long-term
long term contracts are
recognized yearly as a percentage of the
work completed during that year
year.
It is an accounting method similar to the
cash or accrual method of accounting.


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Most accurate way to measure revenues on
uncompleted contracts.
Recognized by GAAP (generally accepted
accounting principles).
Most importantly, most sureties require
financials statements based on this method
for bonding purposes.
A) The WIP Schedule should only be prepared
once a year on the ‘CPA-prepared’ financial
statements.
B) The WIP Schedule should only be prepared
whenever ‘in-house’ financial statements are
submitted to third parties.
C) The WIP Schedule should only be prepared
h
db
/b k
whenever
requested
by surety/banks.
D) None of the above.
D)) None of the above
But WHY??
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It is a supplementary schedule within the
financial statements of a construction
contractor (using the percentage-ofcompletion method) that shows a financial
snapshot of a contractor’s uncompleted
contracts at a specified time period
period.
The WIP schedule may be required by your
surety/banks on a monthly, quarterly,
semi-annual, or annual basis.
COST DRIVES REVENUES!!

Current contract price (including change
orders)

Total estimated contract cost

Cost incurred to date (from inception)

Billings to date
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Estimated gross profit on completed contract

Gross profit percentage

Percentage complete

Revenues earned to date

Gross profit to date
Formula: Current contract price minus
total estimated contract cost.


Example: If you sign a contract for $600,000
and you estimate that your total costs will be
$400,000, what is your estimated gross
profit?
Answer: $200,000
Formula: Estimated gross profit divided
by
b currentt contract
t t price
i


Example: Using previous example (contract
price of $600,000, total estimated costs of
$400,000, estimated gross profit of
$200,000), what is your gross profit
percentage?
Answer: 33 1/3%
Formula: Cost incurred to date divided
by total estimated contract cost


Example: Using previous example (contract
price of $600,000, total estimated costs of
$400,000, estimated gross profit of
$200 000) if your cost incurred
$200,000),
i
d to d
date iis
$20,000 on this job, what is your percent
complete
on this job?
p
j
Answer: 5%
Formula: Percent complete times
current contract price
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
Example: Using previous example (contract
price of $600,000, cost incurred to date of
$20 000 percentt complete
$20,000,
l t off 5%),
5%) h
how much
h
of your revenues have you earned to date?
Answer: $30,000
Formula: Revenues earned to date
minus cost incurred
d to date
d
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Example:
l Using previous example
l (percent
(
complete of 5%, revenues earned to date of
$30 000 cost incurred to date of $20,000),
$30,000,
$20 000)
what is your gross profit to date?
Answer: $10,000

Ono & Chen Builders secures a job with the
Hawaii DOT on 10/1/12 with the following
values:
◦ Contract signed for $500,000
◦ Project manager expects job will cost $250,000
◦ As of 12/31/12
000 of materials have been
12/31/12, $50
$50,000
purchased for the job

Estimated Gross Profit

Gross Profit Percentage

Percent Complete as of 12/31/12

Revenues Earned to Date as of 12/31/12

Gross Profit to Date as of 12/31/12

Estimated Gross Profit = $250,000

Gross Profit Percentage = 50%

Percent Complete as of 12/31/12 = 20%


Revenues Earned to Date as of 12/31/12 =
$100,000
Gross Profit to Date as of 12/31/12 = $50,000

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Sometimes referred
and
f
d to as overbillings
b ll
d
underbillings, it is the difference between
revenues earned to date and amount billed to
date to the customer.
These accounts are balance sheet accounts
and are an offset against revenues.
◦ Cost in Excess of Billings is an asset
◦ Billings in Excess of Cost is a liability


Ono & Chen Builders has earned $100,000
of revenues as of 12/31/12 on a sole
source contract with the Navy and has billed
the Navy $50,000 as of 12/31/12.
Ono & Chen Builders has underbilled the
Navy and must record the following journal
entry on 12/31/12:
◦ DEBIT: Cost in Excess of Billings $50,000
◦ CREDIT: Revenues $50,000


Ono & Chen Builders has earned
$100,000
$100 000 off revenues as off 12/31/12
on an IDIQ contract with the Army but
y$
$130,000
,
as of
has billed the Army
12/31/12.
Ono & Ch
O
Chen h
has overbilled
bill d the
th Army
A
and must record the following journal
entry:
◦ DEBIT: Revenues $30,000
◦ CREDIT: Billings in Excess of Cost $30,000
Note: The journal entries for ‘Cost in
Excess off Billings’ and ‘Billings in Excess
of Costs’ are very important. These
entries
t i di
directly
tl offset
ff t revenues.
1.
2.
3.
4
4.
5
5.
Calculation errors and missing cells
Estimated total cost not adjusted with change
orders and other adjustments
Accrued expenses not recorded
Job losses not recognized in its entirety as an
expense once calculated
Incorrect ‘cost
cost in excess’
excess and ‘billings
billings in excess’
excess
journal entries
1.
Gross profit by jobs
2.
Underbillings – Indicative of a larger issue?
3.
Poor fade!
f d
4.
Cash flow
5.
Distributions to owners and debt
6.
Timely financial reporting
Job 1
Original Contract Price
Amended Contract Price
Job 2
Job 3
Job 4
Job 5
Total
1,250,000.00
1,500,000.00
1,375,000.00
1,425,000.00
750,000.00
500,000.00
5,375,000.00
5,425,000.00
Cost of Good Sold
Direct Materials
Direct Labor
Direct Labor Burden
Direct Equipment
Direct Subcontractors
General Excise Tax
Total COGS
150,000.00
300,000.00
90,000.00
66,000.00
120,000.00
56,250.00
782,250.00
240,000.00
420,000.00
126,000.00
18,000.00
12,000.00
60,750.00
876,750.00
300,000.00
600,000.00
180,000.00
12,000.00
36,000.00
63,000.00
1,191,000.00
9,000.00
60,000.00
18,000.00
3,000.00
240,000.00
13,500.00
343,500.00
30,000.00
17,000.00
5,100.00
3,375.00
55,475.00
729,000.00
1,397,000.00
419,100.00
99,000.00
408,000.00
196,875.00
3,248,975.00
Gross Profit
467,750.00
623,250.00
184,000.00
406,500.00
444,525.00
2,126,025.00
Total COGS
Total Indirect Costs
Total Costs per Job
Estimated Cost to Complete
Estimated Total Cost
782,250.00
69,148.17
851,398.17
851,398.17
876,750.00
96,807.44
973,557.44
973,557.44
1,191,000.00
138,296.35
1,329,296.35
50,000.00
1,379,296.35
343,500.00
13,829.63
357,329.63
400,000.00
757,329.63
55,475.00
3,918.41
59,393.41
290,606.59
350,000.00
3,248,975.00
322,000.00
3,570,975.00
3,892,975.00
4,311,581.59
Original Estimated Total Cost
Percentage of Completion
900,000.00
100%
850,000.00
100%
1,150,000.00
96%
700,000.00
47%
350,000.00
17%
3,950,000.00
Total Gross Profit
398,601.83
526,442.56
45,703.65
(7,329.63)
150,000.00
1,113,418.41
Total Billed
1,250,000.00
1,350,000.00
1,400,000.00
300,000.00
75,000.00
4,375,000.00
Total Paid
1,250,000.00
1,000,000.00
1,000,000.00
150,000.00
75,000.00
3,475,000.00
350,000.00
400,000.00
150,000.00
A/R
Loss Taken
Change in estimated total cost
-
-
900,000.00
Indirect Costs
Insurance
Equipment Rental
Rent - Shop
Repair and Maintanence
Indirect labor
Indirect labor burden
Total Indirect Costs
Job 1
25,000.00
125,000.00
62,500.00
9,500.00
62,000.00
38,000.00
322,000.00
General & Administrative
Salaries and Wages - Admin
Payroll Burden
Office Supplies
Rent - Office
Utilities
Depreciation
Advertising
Meals and Entertainment
Total G&A
250,000.00
75,000.00
37,500.00
50,000.00
6,000.00
8,100.00
3,600.00
6,000.00
436,200.00
Job 2
Job 3
Job 4
Job 5
Direct Labor
300,000.00
21%
420,000.00
30%
600,000.00
43%
60,000.00
4%
17,000.00
1%
1,397,000.00
100%
Total Indirect
69,148.17
96,807.44
138,296.35
13,829.63
3,918.41
322,000.00
Journal Entry for Indirect Costs
Other Direct Cost - Job 1
Other Direct Cost - Job 2
Other Direct Cost - Job 3
Other Direct Cost - Job 4
Other Direct Cost - Job 5
Insurance
Equipment Rental
Rent - Shop
Repair and Maintenance
Indirect Labor
Indirect Labor Burden
To record indirect cost to jobs
4520
4520
4520
4520
4520
5040
5036
5046
5035
5005
5006
69,148.17
96,807.44
138,296.35
13,829.63
3,918.41
25,000.00
125,000.00
62,500.00
9,500.00
62,000.00
38,000.00
Customer
WIP
Job 2
Job 3
Job No.
Contract Price
Ending Prior
Month
Contract
Price Change
in Current
Month
Contract Price
Ending Current
Month
Total Estimated
Cost
50,000.00
1,500,000.00
1,425,000.00
973,557.44
1,379,296.35
Estimated
Gross Profit
(Loss)
% Compl
Gross Profit to
Date
Progress Billings
to Date
973,557.44
1,329,296.35
100.00%
96.37%
1,500,000.00
1,373,343.23
526,442.56
44,046.88
1,350,000.00
1,400,000.00
1,000,000.00
1,000,000.00
150,000.00
-
35.10%
3.21%
Paid to Date
1,500,000.00
1,375,000.00
Job 4
750,000.00
-
750,000.00
757,329.63
(7,329.63)
-0.98%
357,329.63
47.18%
353,871.30
(3,458.33)
300,000.00
150,000.00
53,871.30
-
Job 5
12-05
500,000.00
-
500,000.00
350,000.00
150,000.00
30.00%
59,393.41
16.97%
84,847.73
25,454.32
75,000.00
75,000.00
9,847.73
-
4,175,000.00
3,460,183.42
714,816.58
3,312,062.26
592,485.43
3,125,000.00
2,225,000.00
213,719.03
1,250,000.00
398,601.83
1,250,000.00
1,250,000.00
-
-
-
-
-
-
Sub Total
4,125,000.00
Completed Contracts
Job 1
12-01
1,250,000.00
-
1,250,000.00
851,398.17
398,601.83
Sub Total
1,250,000.00
-
1,250,000.00
851,398.17
398,601.83
851,398.17
1,250,000.00
398,601.83
1,250,000.00
1,250,000.00
Total
5,375,000.00
5,425,000.00
4,311,581.59
1,113,418.41
3,570,975.00
4,562,062.26
991,087.26
4,375,000.00
3,475,000.00
50,000.00
2,719,576.83
31.89%
851,398.17
100.00%
Loss recognized immediately:
(7,329.63)
Loss recognized (automatically) on WIP
(3,458.33)
AJE to recognize additional loss (provision)
(3,871.30)
Adjusting Journal Entry
Loss on contract (COGS)
Provision for Losses (liability)
To record loss on contract
4550
2070
3,871.30
Costs and estimated earnings in excess of billings on uncompleted contracts (asset)
Billings in excess of costs and estimated earnings on uncompleted contracts (liability)
Revenue
To true up revenue for over/under billings
1120
2060
4000
213,719.03
3,871.30
26,656.77
187,062.26
213,719.03
(26,656.77)
A/R
12-02
12-03
12-04
50,000.00
526,442.56
45,703.65
GP %
Costs & Est.
Billings In
Earnings In
Excess of Costs
Excess of Billing & Est. Earn
Revenue Earned
to Date
Costs Incurred to
Date
(26,656.77)
(26,656.77)
350,000.00
400,000.00
150,000.00
900,000.00
900,000.00