What a WIP report can’t tell you

The school addition looked fine all year. Here’s a version most surety brokers will recognise.

In March, the contractor’s WIP schedule showed the $8 million job at 40% complete with a 12% margin. In June it was 65% complete, margin still 12%. In September, 85% complete, margin 9%. At year-end it was 97% complete and showing a loss.

Nobody had hidden anything. Each quarter’s numbers were the contractor’s honest best estimate. But the site superintendent had known since spring that the mechanical sub was behind and that resequencing the steel had eaten the float. That knowledge never reached the schedule the surety was reading.

A WIP report tells you how much money has been spent. It doesn’t tell you how the job is going.

How percent complete really works

A work-in-progress (WIP) schedule lists every open job with a handful of columns: contract value, estimated total cost, cost to date, percent complete, billed to date, and the gap between what’s been billed and what’s been earned (overbillings or underbillings).

The column everyone reads first is percent complete. Most contractors calculate it cost-to-cost: costs incurred so far divided by estimated total cost. As one CPA firm puts it, if a contractor has incurred 50% of its total costs on a job, it recognises 50% of the contract price as revenue (HBK CPAs).

That makes percent complete a measure of money spent against an estimate, not of work in place. Here’s what that means on one job:

Same job, same spending, same honest people. A 6% miss on the estimate to complete moves the profit earned to date by more than 60%. And the WIP schedule can only show the left-hand column, because the right-hand one isn’t known yet.

Five things a WIP report can’t tell you

1. Whether the estimate to complete is right. Everything on the schedule rests on it, and it’s the hardest number in construction to get right. In KPMG’s survey of 109 senior leaders running large projects, only 31% of their projects came within 10% of budget (KPMG, via Construction Canada). When the estimate slips late, the result is profit fade: gross profit on a job ending up lower than previously reported. The Surety & Fidelity Association of America (SFAA) lists profit fade among the warning signs of a contractor in trouble (SFAA).

2. Whether the schedule is holding. Cost progress isn’t physical progress. A job that has bought its steel and equipment early can look well along on cost while the work in place lags. The same KPMG survey found only 25% of projects came within 10% of their original deadline.

3. How changes are trending. A WIP line shows one contract value. It doesn’t show how many change orders are pending, how long they’ve been waiting, or whether the owner is likely to approve them. A job carrying unapproved changes can look healthy right up until they’re rejected.

4. Whether people are stretched. The schedule lists jobs one row at a time. It can’t show that the same project manager and superintendent are covering three of them. SFAA flags exactly this as a warning sign: backlogs that grow without enough project management behind them.

5. Which way the job is heading. A WIP schedule is a snapshot, usually as of a quarter- or year-end and weeks old by the time it’s read. In one case described by an Old Republic Surety underwriter, a job was 97% complete at year-end with $296,000 in underbillings. Six months later, at 99% complete, underbillings had grown to $419,000 while the job kept losing money (NASBP Pipeline).

Good underwriters know all this. It’s why they compare successive WIP schedules, discount underbillings late in a job, and lean on what they know of the contractor. They’re compensating for what the document can’t show.

What fills the gap

None of this is a reason to distrust WIP schedules or the contractors who prepare them. It’s a reason to put better evidence next to them.

The job site already holds most of what the schedule leaves out: progress against the schedule, the change-order log, who is assigned where. Over time it also holds something no single WIP can show, which is how close a contractor’s estimates actually land. A contractor whose jobs finish near the margin they reported, quarter after quarter, has earned a different conversation than one whose margins fade every year.

That track record is what we call the fourth C: capability, meaning what a contractor can actually deliver, shown by evidence from how their jobs really go.

• For contractors, it’s credit for estimates that hold and jobs that finish the way you said they would. That can support the case for more bonding capacity or a stretch project.
• For brokers, it turns a snapshot into a trend. Instead of explaining a soft quarter, you can show the carrier the record behind it.
• When a job does come under pressure, evidence surfaces it early, while it’s still a conversation with the surety on the contractor’s terms, not a surprise at year-end.

Two things stay the same. The contractor controls what’s shared, and with whom. And the underwriter still makes the call: better evidence informs the decision, it doesn’t make it.

Back to the school addition

The contractor in our opener didn’t do anything wrong. Their estimate was off, the job got squeezed, and the WIP schedule reported it the only way it could: late, and all at once. With the site evidence in view, the slip would have shown up in spring, and the broker could have brought it to the surety with a plan instead of an explanation.

We’re testing that idea now with a small group of brokers, contractors, sureties and lenders. If you’re a broker who has had to explain a fade after the fact, or a contractor whose estimates hold and you want that to count, we’d like to hear from you.