So you've calculated work in progress (WIP) on open jobs but something seems off. You think to yourself, "there's no way I could be overbilled so much on this project, that overbilling can't be right." Your "actual gross profit" percentage (from billings to date and cost to date) is much higher than your estimated gross profit on the project. The difference in gross profit percentages doesn't add up. So, what do you do about it?
I recommend the following two options:
1) Check your estimate
2) Look at subsequent detail
**DISCLAIMER**:
The options provided are based on my experiences working on WIP reports. Please keep in mind that every contract and project is different. There may be more to your story than what I'm capturing in this lesson. The following is a simplified approach to addressing overbillings.
Option 1: Check your estimate
According to Exhibit 1, estimated gross profit percentage is 15% and "actual gross profit" percentage is 47%, big difference. In addition, the overbilling on the project is $335,294, which is higher than our expectation. One of the first places to look is the total estimated cost.
The total estimated cost according our schedule in Exhibit 1 is $1,700,000. However, upon further investigation, we learn that the amount is from our original budget when we bid the job. Another thing we learn is that we budgeted the project for expected costs that we learned won't be there, however, we were able to keep the contract price the same. So, we have some savings in cost! What that means is that we need to decrease the total estimated cost by how much we expect to save.
It turns out that we expect to save approximately $400,000 on the project, which means we need to reduce total estimated cost from $1,700,000 to $1,300,000 (see Exhibit 2). This increases our estimated gross profit percentage from 15% to 35% and decreases our overbilling from $335,294 to $161,538, which seems more reasonable.
Exhibit 1:
Exhibit 2:
Stay tuned for Part 2!
Thanks!
Ara
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