General Contractor

Hi Everyone!  We are currently re-evaluating our process for handling WIP adjustments and have a few questions we would love to hear others' responses to/opinions on:

1. Do Operations and Accounting use the same WIP or does Operations have there own reporting in CMiC separate from Accounting?

2. Who in your company is responsible for entering, reviewing, and posting WIP adjustments (contract and gross profit overrides) each month?  Is it Operations or Corporate Accounting?

3. If Operations can input overrides, how is that information reviewed or approved with Accounting before the financials are closed?

4. What are the main reasons you do a contract override?

5. Do you do contract overrides for a return of savings to the owner?

6. What controls do you have in place to ensure overrides are accurate and justified (documentation, review thresholds, approval workflows)?

I realize we have several questions and I know everyone is super busy, so we would really appreciate any feedback you can offer.

Thanks!

Robin-I don't have many comments on the Ops vs. Accounting debate as our Ops team is not involved in financial reporting, but I would say think through the impacts on different financial statement users. You may want to maintain different WIPs for different purposes and remember that different parties may have different motivations for WIP. For example:

Early in a job, you may want to circulate a more conservative WIP (lower margins, higher cost estimates) to external parties (e.g. lenders, bankers, sureties, investors, etc.) to give you wiggle room on costs. A leaner WIP (higher margins, lower costs estimates) may be given to the operations team to encourage them to hold costs down, maintain job efficiency, and reach job bonus targets. Theoretically the WIP profit margins would start to converge as the project is completed.

Anytime you're dealing with complex accounting estimates, you want them as accurate as possible for financial reporting purposes (particularly audit/reviews), but often times accounting is stuck between competing interests from various users of WIP and you need to understand what someone's motivation is when there is an angle for a change in process. I'd say prioritize being consistent across all jobs, segments, and units in approach. I'd also take into account that if there are big variances between an original estimate in margin and the final margin on a job, questions will likely be asked, an explanation will be required, and you don't want the explanation to be something that make it looked like the team missed something it shouldn't have missed. If someone analyzes trends across all projects, they may notice a similar pattern that repeats itself over and over again (like sandbagging or profit fade).

In terms of Ops override, I'd think through potential motivations for override (you likely have a clue to what the issue is in your situation) and adjust for that at the financial reporting level. I'd think you'd accrue an estimate for return of savings to the owner on a monthly basis as the job progresses and it may have swings up or down. Or maybe the ops team wants to present as a change order with revenue/costs/margin partially in place that hasn't met the thresholds for financial reporting to external parties-accounting would back the revenue and costs out on it or at a minimum show no profit on it (may be considered a liability where you recognize the cost but not the revenue if there is question as to whether the change order will be approved).

Hi Everyone!  We are currently re-evaluating our process for handling WIP adjustments and have a few questions we would love to hear others' responses to/opinions on:

1. Do Operations and Accounting use the same WIP or does Operations have there own reporting in CMiC separate from Accounting?

2. Who in your company is responsible for entering, reviewing, and posting WIP adjustments (contract and gross profit overrides) each month?  Is it Operations or Corporate Accounting?

3. If Operations can input overrides, how is that information reviewed or approved with Accounting before the financials are closed?

4. What are the main reasons you do a contract override?

5. Do you do contract overrides for a return of savings to the owner?

6. What controls do you have in place to ensure overrides are accurate and justified (documentation, review thresholds, approval workflows)?

I realize we have several questions and I know everyone is super busy, so we would really appreciate any feedback you can offer.

Thanks!

You bring up some great points!  I really appreciate your response and will pass this along to my CFO.  Hope you are doing well! 

Robin-I don't have many comments on the Ops vs. Accounting debate as our Ops team is not involved in financial reporting, but I would say think through the impacts on different financial statement users. You may want to maintain different WIPs for different purposes and remember that different parties may have different motivations for WIP. For example:

Early in a job, you may want to circulate a more conservative WIP (lower margins, higher cost estimates) to external parties (e.g. lenders, bankers, sureties, investors, etc.) to give you wiggle room on costs. A leaner WIP (higher margins, lower costs estimates) may be given to the operations team to encourage them to hold costs down, maintain job efficiency, and reach job bonus targets. Theoretically the WIP profit margins would start to converge as the project is completed.

Anytime you're dealing with complex accounting estimates, you want them as accurate as possible for financial reporting purposes (particularly audit/reviews), but often times accounting is stuck between competing interests from various users of WIP and you need to understand what someone's motivation is when there is an angle for a change in process. I'd say prioritize being consistent across all jobs, segments, and units in approach. I'd also take into account that if there are big variances between an original estimate in margin and the final margin on a job, questions will likely be asked, an explanation will be required, and you don't want the explanation to be something that make it looked like the team missed something it shouldn't have missed. If someone analyzes trends across all projects, they may notice a similar pattern that repeats itself over and over again (like sandbagging or profit fade).

In terms of Ops override, I'd think through potential motivations for override (you likely have a clue to what the issue is in your situation) and adjust for that at the financial reporting level. I'd think you'd accrue an estimate for return of savings to the owner on a monthly basis as the job progresses and it may have swings up or down. Or maybe the ops team wants to present as a change order with revenue/costs/margin partially in place that hasn't met the thresholds for financial reporting to external parties-accounting would back the revenue and costs out on it or at a minimum show no profit on it (may be considered a liability where you recognize the cost but not the revenue if there is question as to whether the change order will be approved).

Hi Everyone!  We are currently re-evaluating our process for handling WIP adjustments and have a few questions we would love to hear others' responses to/opinions on:

1. Do Operations and Accounting use the same WIP or does Operations have there own reporting in CMiC separate from Accounting?

2. Who in your company is responsible for entering, reviewing, and posting WIP adjustments (contract and gross profit overrides) each month?  Is it Operations or Corporate Accounting?

3. If Operations can input overrides, how is that information reviewed or approved with Accounting before the financials are closed?

4. What are the main reasons you do a contract override?

5. Do you do contract overrides for a return of savings to the owner?

6. What controls do you have in place to ensure overrides are accurate and justified (documentation, review thresholds, approval workflows)?

I realize we have several questions and I know everyone is super busy, so we would really appreciate any feedback you can offer.

Thanks!