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Thanks for the question! Costs on jobs should include retainage. You record the entire cost and your offset is a credit to accounts payable and retainage payable. If you're allocating OH to cost to date you should include an estimate for total OH in your estimated total cost. Otherwise you will inflate percent complete. Billings to date should include retainage. You record a credit to revenue for the entire amount, debit to accounts receivable and retainage receivable. I recommend creating a separate GL account for retainage so it doesn't skew your aged receivables. Hope that helped! If not please let me know! Thanks!- Ara

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Thanks for the comment. Glad you liked the video.

Thank you, I appreciate the kind words! It really means a lot. You've chosen a great industry and I'm sure you'll do great! Thanks again for the comment! Hope you can continue to tune into the lessons!

Thanks for the support and question! Yes it starts from zero for most software. Some software, example Quickbooks, includes all the current year progress billings under revenue. So the detail in that account only includes progress billings from 2024 for example. You will pull in the job subledger that summarizes all those billings by project and reconcile it to the trial balance account. As you mentioned, since it’s an income statement account, it will zero out next year. Since we’re dealing with inception to date amounts (billings to date), you’ll want to add all the prior year progress billings, 2023 and prior, to the 2024 amount. So, your prior year activity was reconciled in the prior years and your current year activity was reconciled this year. Other software will give you inception to date amounts with prior year revenue recognized as a debit revenue account, so the net gives you earned revenue, which takes into consideration the WIP adjustment. Now it’s best to create a separate account for the offset to over/underbillings, so the reconciliation is “neater”. That way all your progress billings go to one account and your WIP adjustment goes to a separate account and it’s not intermingled. Nothing wrong with the other way, just best practice I guess. I hope that all made sense. If not, please let me know! Thanks!

Thank you, I'm glad you found it helpful! If you haven't seen the following video, it might help. czcams.com/video/SNKOSx1mWhg/video.html Underallocated means there were job costs, usually indirect, that weren't allocated to specific jobs. So, when you sum up all the costs associated with projects, they are less than what the trial balance says are the total job costs for the year. From what I've seen, overallocations happen when you're allocating costs that aren't there. Some indirect costs like repairs/maintenance, insurance, depreciation related to equipment usage are allocated based on prior year averages because we don't know how much those costs will be this year. So, if we're using prior year amounts to allocate costs but current year costs are less than prior years, we will be adding more costs than what we actually have, so we're essentially over allocating. I hope that all made sense. I think they matter depending on the amount relative to total job costs. If you have a large dollar amount of unallocated or underallocated job costs, people may wonder if you're properly accounting for job costs or just adding it to the total pool and skewing project performance (profit). Typically, you'll see insurance, depreciation, and repairs and maintenance make up a large part of unallocated costs, which I think is fine. What I'm starting to realize is that a lot of this is just about presentation on the financial statements. If you have proper estimating processes, you will be capturing all the indirect costs and overhead in your markup and gross profit. So, no matter how you present the information the company is making money. The biggest part is making sure the costs you assign to a project result in progress on the project, which typically includes labor, material, and subcontracts. Repairs and maintenance, etc. don't add to the progress but they're still technically job costs. If you're including them by project, you have to make sure they're included in the total estimated job costs as well. I hope that made sense and was helpful. If not, please don't hesitate to let me know! Thanks again for the question!

Thanks for the question! I'll follow up with the dreaded response, it depends. There are typically two schools of thought with this. One school suggests that only costs that reflect progress towards completion of the project should be included in the total estimated cost and cost incurred, which typically includes line items on your schedule of values (ex. mobilization, bonds, material, labor, subcontractor costs). Another suggests that all costs related to a project, both direct and indirect, should be allocated to cost incurred and total estimated costs. In this instance, commissions or referral amounts would be included in costs incurred and total estimated costs. One of the main goals of the work in progress (WIP) report is to give users an idea of how the job is progressing and not necessarily if you're including all the costs such commissions and referrals. The over/underbilling is meant to give a glimpse of what to expect in the future. Your cash needs/obligations or expected cash inflows. I believe this is where the first school of thought (mentioned above) is coming from. All that to say, if you wanted to keep track of commissions/referrals on jobs you would include it in costs incurred and total estimated costs. So in addition to labor, materials, subcontractor, etc., in your estimated total cost, you would include commissions/referrals so you don't skew your progress towards completion. Otherwise your cost incurred would make it appear that your closer to completion than you are since you're including commissions. Hope that helps! Thanks again for the question!

Thanks for the question! Essentially, you divide cost to date by total estimated cost to calculate percent complete. Then you multiply that percent complete by the estimated gross profit. Then you add that amount to the cost to date to determine how much revenue you can recognize. If that latest calculation is more than your billings, you have an underbilling. If it's less than your billings, you have an overbilling. Also, I would recommend downloading the template using the following link to see it. It should help you run through different scenarios to see how it comes together. www.thewipreport.com/post/wip-template Hope that helped! Thanks again!

Thanks for your question! I am going to do my best to answer this but I may raise some more questions along the way. When I think of the Construction in Progress account, I think of the asset that is being built for the company in question but isn't complete, which means it hasn't been put into service yet (not yet depreciated). If a construction company is on the completed contracts method, they may have a construction in progress account (asset or liability) where they record all activity on their projects, both costs and billings. When the project is complete, they adjust out all the contract activity on the completed project and move it to the income statement. They will credit that account and debit costs, and debit that account and credit revenue. Is the progress billings account you're referring to a liability on the balance sheet? This may be the account where they are recording billings until the project is complete. Neither one of the accounts I mentioned exist on a percent complete basis. Please let me know if that helped or didn't. I want to make sure I address your question properly. Thanks again for your question.

@@thewipreportconstructioncp2373 Thank you for this detailed response! When you said, "Neither one of the accounts I mentioned exist on a percent complete basis. " you answered my question perfectly. I had recently watched a video and read a textbook (please see link below) where they said "Construction in Progress" and "Progress Billings" (you are correct this is the liability account that accrues billings) are used on the POC method on the 2nd half of the video. This was throwing me off, maybe you can make sense of it. Seems as if what they're saying creates more work?czcams.com/video/C-NwN6OoBjw/video.html . Correct me if I'm wrong but under POC the Job expenses should hit the P&L right away as well as the Billings. Then at month-end an Over/Under adjustment can be made to adjust the revenue to match what Revenue Recognized should be under POC Cost-to-cost method with a corresponding debit to Underbillings (asset) or credit to Overbillings (liability)

The whole part after "Correct me if I'm wrong..." is correct! That's exactly how you do it with the percent complete method. Yes, I think he's discussing completed contracts method as well, which deals with the accounts you mentioned in your previous reply. The description says "Journal Entries for Long Term Contracts - Completed Contract v. Percentage Completion". So I'm assuming he talks about both. Hope that helps.

Thank you for the kind words and thanks for subscribing! Awesome! I hope you can solve it tomorrow. I'm sure you'll get there! Feel free to reach out with questions!

Thank you. I understand where you're coming from. I hope the more information we put out, the more clients will catch on. Thanks again for the comment!

Hello! That's a really great question. A common approach I've seen and used is to ignore prior year revenues earned and costs incurred for your first year of implementation. Another approach is to record WIP in the prior period using a prior period adjustment by adjusting retained earnings. For simplicity's sake, I think the first option makes the most sense. If you do this, your revenues and costs from your job schedules won't agree to your income statement, which is fine as long as you have an accurate WIP on your balance sheet. I would just make sure that your billings to date and costs to date on your WIP are from inception to date. That's the biggest piece that will help the users of the financials. It might be a good exercise to calculate WIP in November if you have never done so. Depending on how many open jobs you have and if information isn't readily available. Maybe just going through the motions would make December go smoothly. Hope that helped! If not, please let me know! Thank you for your questions!

Thank you so much!

You're welcome! You brought up a good topic. I'll make a video about the first year of putting a WIP together. Thanks!

You're welcome! Thanks for tuning in and commenting. If you have any questions about other entries, please let me know. Thanks again!

Glad you're enjoying the videos! Thank you!

Where did the $25,000 come from?

Great question! The $25,000 amount was a cost the company incurred in 2022 but did not record by 12/31/22. We were supposed to assume they received the invoice after year end and therefore recorded it in the following year, which is a mistake because they actually owed that amount by 12/31/22. The first scenario assumes they made the mistake of not recording that cost. So the entry is meant to show the correct way to recognize the cost and how that changes their WIP. I hope that helps, if not, please let me know! Thanks for asking and feel free to ask more questions! Thanks again!

Thank you for tuning in! I really appreciate the kind words!

That makes sense! Thank you so much!@@thewipreportconstructioncp2373

Great, you're welcome! Thank you!

Anytime! Please feel free to reach out with any questions! Thanks for tuning in!

Thank you for the question. It depends on how much costs you've incurred so far and how much the contract price and total estimated costs will change. I recommend downloading the template using the following link and inputting the contract information associated with a specific job, and the billings and costs to date. Once you've done so, document the total over/under billing. Then, change the contract price and estimated costs associated with the change orders to calculate the new under/over billings. If overbillings decrease or underbillings increase, you'll be recognizing more revenue. If overbillings increase and underbillings decrease, you'll be recognizing less revenue. www.thewipreport.com/post/wip-template If you have any questions, please let me know and I can try to guide you through the process. Thank you!

Hello! Yes, retainage is included in the billed to date column.

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