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Work in Progress (WIP)
What is Work in Progress (WIP)?
In construction accounting, work in progress (WIP) refers to the value of construction projects that have started but are not yet completed at a specific point in time. It represents the costs incurred and revenue earned on ongoing projects. Key aspects of WIP include everything from cost tracking, revenue recognition, billing cycles, and financial reporting to schedule monitoring, change order management, retainage tracking, and tax planning.
As mentioned in our WIP Accounting Principles blog post, understanding WIP is a critical component of running a profitable business. This is because it offers several key benefits:
- Financial Health Tracking: WIP reports help to identify potential issues before they spiral to keep projects on track. For example, it can help spot gross margin slippage early on and alert project managers that they need to course correct.
- Cost Management: Comparing work completed to the budget spent will alert subcontractors if project expenses are running too high. For instance, if only 25% of the work is complete, but 40% of the project labor budget has been used, it indicates the need to reel in costs.
- Compliance: WIP reports help ensure that invoices align with work completed, reducing the risk of pay app rejections
- Profitability: WIP reports systematically account for project-related costs and revenue. This gives subcontractors a clear picture of which projects are most profitable and spot trends to help determine the best project types for the business.
Effective WIP management is crucial for subcontractors' financial health. Modern billing and cash flow forecasting software, like Siteline, enhances WIP accounting by centralizing data to increase financial visibility, improve informed decision-making, and optimize cash flow. To see how Siteline can help improve your business’s WIP management, book a demo today.
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Other construction terms
What is a Pay-if-Paid Clause?
A Pay-if-Paid Clause is a contractual agreement prevalent in the construction industry. Generally, this clause can be found in subcontracts between the General Contractor(GC) and their subcontractors. According to the clause, the GC is not obliged to pay the subcontractors unless and until they themselves have received full payment from the project owner. Therefore, it effectively transfers the risk of the project owner's insolvency from the GC to their subcontractors. It serves as a protection for the GC against financial instability. This type of clause has its controversies, as some jurisdictions view it as unfair to subcontractors due to the assignment of financial risk.
What is a Request for Proposal (RFP)?
A Request for Proposal (RFP) within the construction industry is a comprehensive document that outlines the specifics about a particular construction project. It's a call to bidders, helping interested contractors and construction firms understand the project details, timelines, expectations, and criteria for selecting the winning bid. An RFP in the construction industry typically includes information such as project scope, schedule, required materials, budget, and other relevant factors. It acts as a formal invitation, allowing companies to bid on the project by proposing a plan that meets or exceeds the listed requirements. This inherently ensures competition, dedication towards the job and best value for money for the project owner.
What is a G702?
A G702 is a document form used in the construction industry known as the Application and Certificate for Payment. It is issued by the American Institute of Architects (AIA) and is used by contractors to apply for payment for the work completed and materials supplied on a project. It details the contractor's progress on the project, summarizing the total project to date, change orders, previous payments, and the current payment due. The form needs to be signed by the contractor, the architect, and the owner, certifying that the work has been completed and payment is deserved.
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