Most advisors and CPAs who work with contractors can read a balance sheet. Fewer can read a WIP schedule — and that's exactly where contractor clients hide their biggest problems.
If you're new to construction, or you've been working with contractors for years without digging into the work-in-progress report, this is where to start. Not because the schedule is complicated, but because misreading it — or worse, ignoring it — means you're advising on an incomplete picture.
What a WIP Schedule Actually Is
A WIP schedule is a report that shows the status of every active contract a contractor is working on at a given point in time. For each job, it captures:
- Total contract value — what the customer agreed to pay
- Costs incurred to date — what has actually been spent
- Estimated total cost to complete — the contractor's projection for what the job will ultimately cost
- Billings to date — what has been invoiced to the customer so far
- Estimated gross profit — the margin expected on the contract
From those inputs, you can calculate two things that matter enormously: overbillings and underbillings.
An underbilling means the contractor has earned more revenue than they've billed. Revenue recognized exceeds billings sent. The work is done; the invoice hasn't gone out. That underbilling shows up on the balance sheet as an asset — "costs and estimated earnings in excess of billings" — but it is not cash. It's uncollected revenue sitting on the schedule.
An overbilling is the opposite. The contractor has billed more than they've earned. Cash has come in ahead of the work being completed. That shows up on the balance sheet as a liability — "billings in excess of costs and estimated earnings." It's essentially a deferred revenue account: the contractor owes the customer that work.
Both are normal. The issue is when they're large, unexplained, or moving in the wrong direction.
Why the Mix Matters
A contractor with significant underbillings has a cash problem they may not be describing accurately. They're doing the work. The revenue is there on paper. But the cash hasn't followed.
That gap has to be funded somehow — usually out of working capital, a line of credit, or by slow-paying their own vendors. A company with $800,000 in underbillings is carrying $800,000 worth of completed work they haven't collected yet. That is not a small number for a $5 or $8 million contractor.
A contractor with significant overbillings is in a different position — they've collected cash before doing the work. Short-term, that looks fine. But it creates a liability the business has to work off. If jobs go sideways, those overbillings turn into real problems because the contractor owes a customer work they may not be able to complete at the margin they projected.
The pattern I look for is movement. Is the schedule getting healthier or worse from period to period? Are underbillings growing faster than revenue? Are certain jobs showing up on the schedule longer than expected?
The Margin Story
The gross margin in the WIP schedule is often the most important number in it — and it's the one that gets the least attention.
Every job on the schedule has an estimated gross profit when it starts. That estimate changes as the job progresses. When a contractor is burning through costs faster than expected, the estimated margin shrinks. Sometimes it goes negative before the job is done.
A WIP schedule full of jobs with compressed or deteriorating margins is a leading indicator of trouble that won't show up on the income statement for another quarter.
This is exactly why annual financial statements, by themselves, tell an incomplete story for a contractor. A contractor doing $10 million in revenue with respectable margins on their P&L can have a WIP schedule showing that the margins on the next several million dollars of work are already eroding. You won't see it in the income statement until those jobs close.
What to Ask Your Contractor Client
If you're working with a contractor who doesn't produce a WIP schedule, that's the first conversation to have. Any contractor doing significant volume on multi-month jobs needs one. Their bank or bonding company probably already requires it.
When you're reviewing the schedule, the questions that matter are:
On underbillings: Are these aging? A 30-day underbilling on a project that's actively billing is normal. A 90-day underbilling on a job that's supposed to be wrapping up is a problem. Ask when the invoice is going out.
On overbillings: What's the remaining work on these jobs? A contractor who is overbilled on a project with 80% of the work still to do either has a billing problem or a cost-to-complete problem. Find out which one.
On margins: Compare the estimated margin at the start of each job to where it stands now. If margins are compressing consistently across multiple projects, that's not a coincidence. Something in the estimating process, the field execution, or the cost controls is off.
On total backlog: Add up the remaining contract values across all active jobs. That's the contractor's committed revenue pipeline. Compare it to last quarter. Is the business growing, flat, or burning through backlog without replacing it?
The Balance Sheet Connection
None of this analysis stays on the WIP schedule in isolation. The underbillings and overbillings flow directly to the balance sheet — as assets and liabilities respectively. Which means a contractor whose balance sheet shows a large "costs in excess of billings" line has a real asset, but one that depends on collecting from customers who may or may not be on the same timeline.
If you're being asked to advise on a contractor's financing, their capacity, or their bonding program, the WIP schedule isn't optional reading. It's the most current picture of where the business actually stands.
A P&L tells you where the business has been. The WIP schedule tells you where it's going.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to construction and specialty-trade businesses. He works with advisors, lenders, and CPAs who need a more complete picture of what their contractor clients are actually doing.
jrbohlke.com • The Analysis