Billings or earned revenue
In a non accounting mind, from a cash standpoint, it makes more sense to project billings, costs and retainage held to give a cash position.
In the accounting world it makes more sense to project earned revenue off of anticipated job cost to get a real earnings to date.
Construction WIP reports to GAAP standards – percentage of completion SOP 81-1
-Contract value – budget/estimated cost = estimated earned profit
-Primary key to percentage of completion is actual cost divided by budgeted/estimated cost
Therefore estimated projected costs need to be updated at least monthly to get a accurate as possible percentage of completion
After all costs are entered, billings are updated, change orders entered, projected estimates are updates, you can calculate your WIP report
-Actual cost divided projected revised estimated cost = % of completion
-Contract Value X’s % of completion = Estimated earned revenue
-Billings – Earned revenue = under or over billings
-Revised estimated cost – actual cost = cost to complete
-Contract Value – billings to date = contract balance to Bill
So you can see billings and revenue earned are the construction industry differences
In a perfect world-all actual costs and billings in a period – posted in that period would most likely result in zero over / under billings
However-its not a perfect world.
-all costs might get entered, but billings might not
– Contract agreements might require billings cut off date in the middle of the month
-Costs are posted for the entire month
This leads to under billings for the month and the remaking billings for this period will be posted in the next period
If all costs are not entered in the next period the results could lead to over billings
Why you ask would some costs not get entered in the period of the cost?
Unapproved change orders, disputes, claims – these don’t make it to accounting by cutoff date for month end.
“A construction company is a risky venture. Each year, many construction companies go out of business. Operating a successful construction company requires a specialized set of financial management skills, because of the unique nature of the construction industry.” – Construction Accounting and Financial management-Steven J. Peterson (This book can be purchased from Amazon)
Terry E. Kelley MBA