Contract Management

Construction contractors must satisfy the informational needs of their surety underwriters to assure the availability of bid and performance bonds. One of the peskiest items is a Work In Process schedule, referred to as a “WIP” or “WIP Schedule.” They may be requested as frequently as monthly, and the task often falls to the contractor, rather than their accountant.

Why are these so important and what is the best way to deal with them?

First off, we should remember that bonding companies strive for a zero loss ratio. Unlike insurers, they have almost no tolerance for claims and defaults. Indeed, their financial survival depends on avoiding such events. Therefore underwriters want to monitor the status of the jobs they bond as well as the contractor’s other work – which could drag down the bonded projects if they become a financial drain.

Some of the things underwriters glean from the report are the amount of uncompleted work and its projected gross profits. Over time, the quality of estimating and field supervision is proven. The company’s billing practices and profit management are evident. It also enables underwriters to observe the addition of unbonded projects and the conclusion of open contracts. All these elements are factored into the decision making process on any currently needed bonds.

So given that the information is so relevant, how best to prepare it?

Step One is that cost records must be maintained “by project.” On a daily basis, the contractor needs to know how many bricks and how much labor when into each contract.

Step Two is that the “remaining costs to complete” must be periodically re-estimated. When the project is underway, it should be figured taking into consideration the actual reality of the project. Is the labor going better than expected? If so, the estimated remaining costs for the uncompleted units may be reduced. Did we buy out materials better than expected? Has the weather been bad? Did we hit poor soil conditions? Outside factors slow down our pace? The re-calculation of “remaining costs to complete” should be more than merely subtracting “costs incurred to date” from the “ORIGINAL estimate of costs.” It should be an enlightened look forward that enables the contractor to manage the ultimate profitability of the contract at a time when he has a chance to affect the outcome.

Bottom line: If you need help preparing this document, ask! Your CPA or bonding agent can help. Master the WIP Schedule and it will enhance your gross profits and impress your bond underwriter.

Steve Golia
http://www.articlesbase.com/insurance-articles/fun-with-wips-664691.html

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