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MAKING PRODUCTIVITY VISIBLE TO EVERYONE
®
CWIP™ Overview
Construction contracting is one of the most rewarding, yet challenging professions in the world. It is
one of the few professions that requires massive up-front investment prior to actual cash inflow. The
rule of thumb for any project start up is 30% of the total value of the contract has to be available
for up-front investment before any billings. In fact, most of the projects do not become cash-flow positive
until the last 5-10% of the job. The dilemma contractor’s face with income, cash-flow, billings, and
expenditures requires a constant balancing act. The contractors need a system that allows them to see
cash-out, billing, and cash-in, in order to manage their daily activities. Unfortunately, neither the
accounting nor the estimation data can help create a visible and responsive process for Sales, Billings
and Cash-Flow. The fact of the matter is that the sales of a contractor have nothing to do with its billing.
This misunderstanding could cost the contractors tens of thousands of dollars in revenues and taxes.
What is Construction Work-In-Progress (CWIP™)
Most construction accounting programs have a module dealing with CWIP™, the typical elements of a simple
and basic CWIP™ are:
- Contract values (base amount plus approved changes)
- Contract cost estimates (base amount plus approved changes)
- Original Estimated profit margin (with and without approved changes)
- Job Cost to date
- Value of completed construction
- Actual billings
- Over / Under Billing
- Projected Profit margin
The CWIP™ calculation relies on a combination of hard numbers (actual job costs,
actual billing amounts and revised contract values) as well as the Project Managers’ educated guess at
values such as:
- Construction put in place (value of the scope of work completed)
- Projected cost to complete the remaining work
- Value of pending changes and extra work
When provided with the necessary information and routine updates, most accounting software packages will provide some
sort of standard reporting that goes beyond a simple tally of the job costs incurred to date. Often these reports, by
names, will contain calculations of the percent complete (based on the proportion of estimated cost that has been
incurred), an estimate of the remaining cost to complete the scope of work, the expected profit margin, and whether
he project is over billed or under billed.
A CWIP™ report should be used by core management and outside parties for the assessment
of the current financial health of the contracting business. This report is a critical measure of the management’s
financial accountability in the contracting business, and as such the accuracy of the CWIP™
report is a key focus area for contractors of all sizes. Regardless if the size of a company is small and privately
held or a multi-billion dollar holding company seeking compliance with Sarbanes-Oxley reporting requirements,
the CWIP™ report is a principle tool for accurately monitoring a projects financial performance.
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