Published April 16, 2024 . 4 mins read

Decoding WIP Reports: The Surety’s Perspective on Project Performance

Measuring project performance is crucial when a surety extends bond credit to a contractor. Open/Closed job work on hand becomes the “report card” not only for the contractor but also for anyone extending credit to them. The surety meticulously analyzes the contractor’s schedule of completed and uncompleted work to gain a better understanding of the contractor’s financial status and their ability to make accurate estimates on jobs.

The surety examines the amount of profit the contractor earned on completed and ongoing jobs. The profit on open jobs heavily depends on the contractor’s estimate of the final outcome. Profits on jobs nearing completion are more accurate than those in the early stages. Closed information provides a more reliable indication of cash assets than expected or estimated profit from unfinished work.

Surety underwriters assess past profit margins on jobs similar in size, type, and duration to the current work. If margins on previous jobs are lower than the original estimates for the current work in progress, the contractor needs to explain the optimistic forecast.

Margie Morris, CCIFP
Partner at Guignard Company

Over/underbillings in ProNovos

Regarding overbillings, the practice of front-loading is quite common. A red flag to underwriters is when a contractor who has experienced losses on overbilled jobs bids low on new work to create new overbillings to cover cash flow deficits in later stages of losing jobs. While sureties accept overbilling as long as the contractor keeps funds liquid and does not withdraw them to cover cash flow deficits.

Underbillings may be intended to offset earlier overbilling amounts or may indicate difficulties on the job. If a job is expected to lose money but the contractor hasn’t recognized it yet, the losses may first appear as underbillings. Causes of underbillings include a bust cost estimate or unapproved/disputed Change Orders, which would show up as underbillings.

Consistency and accuracy of work on hand from the start to finish of a job help determine how far a surety will consider extending or stretching bond programs for a contractor. The surety places significant emphasis on the fade analysis over the life of a project and overall differences from year to year. The fade analysis may identify meaningful patterns and/or material differences. More variability in gross profit per contract over time is viewed negatively in the surety industry since predicting future profitability becomes less likely.

Breaking down profit fade/loss analysis by project manager, estimator, and category of work often accounts for the fade. An inexperienced accounting department or fraud can also contribute to these issues.

Be sure to catch Margie at CFMA’s Annual Conference on Wednesday, May 22, at 8 am, when she presents “Real-World Construction Financial Insights” alongside Bruce Orr, CEO, ProNovos; Bob Biehl, CPA, CCIFP, Director, Construction Industry Services, GBQ Partners LLC; and Gerardo Perez, Senior Vice President Relationship Manager, First Bank.

In this interactive session, you’ll experience construction financial data insights from various perspectives. In the first half of this session, a panel of industry experts consisting of a data scientist, banker, CPA, and surety professional will use a real-world scenario to show you how they assess the WIP to make strategic decisions, identify areas of concern, and evaluate the health of construction companies. They will share strategies and tips. Then, it’s your turn to review a real-world scenario with your peers to review the data to identify issues and develop a solution.

Learning Objectives:

Interpreting Data Trends: Participants will learn to identify and interpret key data trends within construction financial datasets, enabling them to recognize potential financial challenges and opportunities within their organizations proactively.

Cross-Industry Insights: Attendees will gain a deeper understanding of how financial data is analyzed and leveraged across various sectors, such as data science, banking, accounting, and surety, to broaden their perspective on financial management strategies.

Through hands-on activities, participants will develop practical problem-solving skills by applying data analysis techniques to real-world construction financial scenarios. This will empower them to make data-driven decisions in their roles and address complex financial challenges effectively.