The Critical Processes Demanded By the WIP

Now let’s get on to the really exciting part of the Work-In-Progress schedule and those are the processes within the company that are driven by the WIP.  The report is the reflection of the processes and the processes are what truly drive financial results over time. 

The Work-In-Progress schedule boils down to just four critical pieces of information:

2 Facts

2 Estimates by Management

The two facts are the job-to-date (JTD) costs and billing amount.  The two estimates by management are the final revenue and costs estimated at the completion of the project.  Everything else on the WIP schedule is a formula calculated by these four important pieces of information. 

While these four pieces of information seem very simple, the truth is that they are often more difficult to get accurately than they seem.  Let’s take a look at the processes it takes within the company to get these things correct:

1. Accurate Job-To-Date Costs:  There are a couple big factors involved here. 
   1. The first is simply to get the direct job costs allocated to the correct job and correct cost code.  There is no way that this process happens perfectly every time without the PM and foreman regularly looking at the job cost reports and verifying the accuracy of the costs. 
   2. The second is the proper allocation of indirect job expenses in a manner that is consistent and proactive, such as allocating based on actual usage in the case of vehicles and equipment or basing allocation on labor hours in the case of small tools or some other consistent driver.  Looking in the “rear view mirror” and simply spreading these costs every month, quarter or year is the easiest but often dumbest way to deal with indirect costs because it makes them difficult to truly manage. 
   3. The third is to get costs accounting for in the correct accounting period with the goal being to get the all costs associated with the work done for that particular period actually on the job cost reports during that period.  Again, this seems relatively simple but in practice; especially if you are dealing with small subcontractors or vendors this is usually more difficult than it seems.  While it may seem counter-intuitive your company will actually start to run better if you hound vendors to get their bills in more timely and accurately.
2. Progress Billings:  Again, this may seem like a process that happens correctly within your company on a regular basis – and it may but we overwhelmingly see companies run into problems here; especially when they hire new project team members or go through a growth spurt.  The goals here should be to (1) bill for as much as possible as early as possible, (2) bill in a format that is “easy” for the customer to understand, approve and pay and (3) to make sure that this is accounted for during the right period so it reflects accurately on the WIP schedule. 
3. Management’s Estimate of Revenue at Completion:  This is where the fun really begins and you can really start to monitor / drive performance out of the project team.  To come up with this number you will have to review the original contract amount, thoroughly review the change order log making an estimate of what is and is not likely to get paid as well as look forward and estimate what future potential changes are coming up.  If the job is a T&M contract you will have to make a solid estimate of how much work is really out there to complete the project.  From the standpoint of a senior manager, owner or financial manager this is where you can really gain an understanding of the project revenue. 
   1. Ask detailed questions about each and every change order. 
   2. Look for potential problem areas such as changes that have been lagging on approval times.
   3. Get a feel for how well the Project Manager really knows their project by asking these detailed questions including how well they know the customer and can predict future changes.
   4. Look at how organized the project team is by looking at how their changes are prepared and filed – most companies lose thousands of dollars on each project simply because of poorly organized change orders and the backup that goes along with them.  Check for details such as signed T&M tags, proper notification of potential changes, etc. 
   5. During this process for each project you should be keeping track of some short-term action items to hold each project team member accountable for on each project such as following up on a particular change or getting some changes that have been sitting on their desks priced and returned to the customer.  These short-term action items should be followed up on within a few days to a week.  Over time this process will help shape all project team members to focus on this important aspect of project management in the same way you do. 
4. Management’s Estimate of Project Costs at Completion:  If you thought the revenue side estimate was fun this is the part that is really difficult to get right but allows for such deep discussion and training that it is well worth it! 
   1. First of all to get this process even started it means that you have to have a good budget to start with.  If you want this process to work a good budget is a must so if a good budget is missing you will have to start from scratch and create one.  This may seem like a waste of time but making a project team totally responsible for having an accurate budget is a huge step in the right direction. 
   2. Then, with an accurate budget you will have to keep it updated as changes are made to the contract requiring a solid change order process that not only includes accurate budgeting of changes but also a clean integration with accounting so everyone in the company has the same information at the same time.  
   3. If there is an accurate budget in place and accuracy in job costing as discussed above, then you can start looking at the project cost-code by cost-code and discuss the actual progress and what is left to do.  These discussions need to be rigorous with questions starting at a higher level and drilling down all the way to individual tasks on the project.  This is where discussions about potential cost-saving methods can be reviewed and where best practices can be shared along with lessons learned.  Production information can be shared between the project team and the estimators to help refine the process for future bids.  Again, a notepad should be kept handy and short-term action items should be developed at each meeting to help move the project along. 

This seems so simple, yet in practice, it is very, very difficult to get right.  Too many owners, managers and financial people simply gloss over the detailed and rigorous discussions needed to truly drive performance and build a solid project team.  They often mistakenly believe that just because someone has the title of Project Manager or Superintendent that they automatically will be looking at all these details.  Everyone performs better when there is a process of rigorous dialog going on.  Managers learn more about the details of the projects as well as learning the strengths and weaknesses of their project team members.  Everyone learns from the experience of each other.  The project performs better because this sharing of knowledge is turned into clear, concise short-term action items. 

Getting this process working right will add consistency and profitability to any construction company.  It will also increase the cycle time in getting new project team members up to speed. 

Timeline – depending on where you are within the process right now, most companies take about 6-12 months to get the “mechanical” parts of the WIP working properly, which just means the accounting pieces including job costs, the report itself and tying it together with the balance sheet and P&L statement.  The process of getting effective project review discussions happening takes 15-30 months depending on the tenacity of the owners and senior managers.

At first, these meetings may seem like they drag on and on because it takes so long to get the information out and for everyone to start speaking the same “language,” but you need to stick with them until they really begin to click.  Giving up after a few months because people are frustrated and the process is taking too long won’t do anything for you – don’t even plan to start the meetings. 

We are going to dive into the subject of project meetings a little bit further when we answer the question, “What should we talk about in project review meetings?” in an upcoming post. 

If you have any questions or comments related to this post send them to david@dbrownmanagement.com or leave them as comments to this post. 

This entry was posted on Thursday, September 11th, 2008 at 12:59 pm and is filed under David Brown Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.