Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
When meeting with new contractors looking to qualify for increased bonding capacity, one of the first items generally discussed is the work-in-progress (WIP) schedule. Understandably, the balance sheet and profit & loss statement get the most attention when compiling financial information for the bond company, but the WIP, whether on a quarterly or six month basis, allows the bond company to gauge how well the contractor has estimated their projects and how conservative they have been on a project’s profitability. Preparation of an accurate work in progress schedule is the only way to gauge the true profitability of the company.
The WIP or status of contracts schedule is used to track the progress of contractors’ projects from start to finish. The schedule discloses the details of each contract’s percentage of completion, and profitability to date in the current reporting period.
The major components of the WIP include:
The Contract Amount (which may go up and down throughout the contract based on change orders).
The Costs Incurred to Date (we recommend to charge as many costs back to the project as possible).
Total Estimated Costs (should be updated on a timely basis).
Billed to Date (billing the project on schedule).
The accuracy of the WIP schedule is extremely important since the bond company will provide capacity to the contractor based on profit to date for each project. The bond underwriter will track the projects over a certain period to determine if profits typically close higher or lower than the original estimate. For example, let’s look at a contractor who initially estimates his projects at 15% profit when they start up, yet historically closes them out at 20% at completion. If the contractor anticipates a $100,000 profit on a project and the work is 50% complete, the bond company may provide an additional $500,000 of capacity on that $50,000 profit (10% case) even though the project has not been closed out.
On the reverse side, a bond company will have major concerns when they review a WIP schedule from a contractor that typically closes out projects at less than the original estimate.
If you would like a better understanding of how the work-in-progress schedule affects your Bond Program, please contact Rancho Mesa Insurance Services, Inc. at (619) 937-0165 to discuss ways to maximize your bond capacity.