WIP stands for work in progress. It is work you have done but not yet invoiced.
In construction it is usually the largest number on the balance sheet that nobody can explain, and the one most likely to be wrong.
If you are here for the plain definition, that is it. If you run a contracting business and you want to know why your accountant keeps asking about it, the rest of this is for you.
What work in progress actually is
You have spent money on a job. Labour has been paid, materials have been bought, plant has been hired. The customer has not been invoiced for all of it yet.
That spend has to go somewhere. If you leave it in costs, your profit and loss shows a loss on a job that is going perfectly well. So it sits on the balance sheet as work in progress until the revenue it relates to is recognised.
That is the whole idea. WIP is the bridge between what you have spent and what you have billed.
Why it matters more in construction than anywhere else
A shop buys stock and sells it the same month. A contractor can start a job in March and finish it eighteen months later, and the accounts have to say something sensible about it at every year end in between.
Four things make construction WIP harder than ordinary stock.
- Contracts span year ends. The profit on a half built job has to be estimated, not counted.
- You apply for payment, you do not invoice. An application is not a sale, so the timing of revenue and the timing of cash come apart.
- Retention is held back. Money you have earned sits with the customer for months after practical completion.
- Variations get instructed before they get agreed. You have done the work and there is no paperwork to bill against yet.
How work in progress is calculated
At its simplest, WIP is the cost you have incurred on unbilled work, plus the profit you have earned on it, less what you have already invoiced.
Under FRS 102 revenue on a long contract is recognised by reference to the stage of completion. So the first question is always the same: how much of this job is actually done?
Two common ways to answer it.
Cost to cost. Costs incurred to date divided by total expected costs. Spend £300,000 of an expected £500,000 and you are 60% complete, so you recognise 60% of the contract value as revenue.
Surveyor valuation. The valuation of work done, taken from the measure rather than from the spend. More accurate on jobs where cost and progress do not track together.
A worked example
Contract value £500,000. Expected total cost £400,000. Costs to date £300,000. Invoiced to date £280,000.
- Stage of completion: £300,000 divided by £400,000 equals 75%
- Revenue to recognise: 75% of £500,000 equals £375,000
- Already invoiced: £280,000
- Amounts recoverable on contracts: £95,000
That £95,000 is the figure that appears in the accounts. It is revenue you have earned and not yet billed.
Run it the other way and you can end up with the opposite. If you had invoiced £400,000 against £375,000 of earned revenue, you would be carrying £25,000 as a liability, because you have billed for work you have not done yet.
The part that goes wrong
The stage of completion rests on your estimate of total cost to finish. Change that estimate and the profit in your accounts changes with it, without a single invoice moving.
Overstate how complete a job is and you declare profit you have not earned, pay corporation tax on it, and push the correction into next year as a loss on a contract you thought was winning. Understate it and you look less profitable than you are, which matters the day you apply for finance or a bond.
Neither is fraud. Both are the same arithmetic done on a different guess.
Onerous contracts
If a job is going to lose money, you cannot spread that loss across the remaining months. The whole expected loss is recognised as soon as you know about it.
It is the rule people most often get wrong, and it is the one that turns a bad quarter into a bad year if it is missed until the audit.
WIP, retention and applications are three different things
They get lumped together and they behave differently.
- Work in progress is work done and not yet billed.
- Applications for payment are billed and not yet certified. Not a VAT invoice, and not revenue on their own.
- Retention is certified, earned, and deliberately withheld. It is a debtor, not WIP, and it belongs shown separately because it is not collectable on normal terms.
Showing retention inside trade debtors makes your debtor days look worse than they are and hides money that is not coming for a year.
Questions we get asked
What does WIP mean?
Work in progress. Work you have carried out but not yet invoiced, held on the balance sheet until the revenue it relates to is recognised.
Is WIP an asset or a liability?
Usually an asset, shown as amounts recoverable on contracts. It becomes a liability when you have invoiced more than you have earned, which is shown as payments on account.
How do you calculate work in progress?
Work out the stage of completion, apply it to the contract value to get revenue earned, then deduct what you have already invoiced. The difference is your WIP position.
Does WIP affect profit?
Yes, directly. WIP is how cost and revenue get matched to the same period. Get the stage of completion wrong and the profit in your accounts is wrong by the same amount.
Is WIP the same as stock?
No. Stock is goods you hold to sell. WIP is work you have performed. Materials sitting in your yard are stock. Materials fixed into a building you have not billed for are part of WIP.
Do I pay tax on work in progress?
You pay corporation tax on the profit your accounts show, and WIP is part of how that profit is arrived at. So an overstated WIP position brings tax forward on money you have not collected.
Who we work with
- Sector: construction only. Contractors, subcontractors and the trades that work on site.
- Turnover: roughly £500,000 to £5 million a year.
- Structure: mostly limited companies, plus established sole traders and partnerships.
- Where: our office is in Cannock, Staffordshire. We work with clients across the UK on cloud accounting.
Who we are not for: businesses outside construction, property developers, brand new start-ups with no trading history, and anyone who wants filing done and nothing else.
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If your WIP figure is a guess
Most of the WIP numbers we see on taking over a set of accounts were calculated once a year, in a hurry, from a spreadsheet nobody trusts.
It does not have to be like that. Reviewed during the year it is a management number rather than a year end scramble, and you find the losing contract while there is still time to do something about it.
Have a look at job level profitability, or book a call and we will go through how yours is currently being worked out.