If you're running a construction company with projects that last several weeks or months, a Work-in-Progress, or WIP, schedule can be a useful way to keep track of how those jobs are actually doing.

In general, the WIP schedule is comparing how far along a project is to how much you've billed the customer. This can help you see whether you're ahead or behind on billing and, more importantly, what that may mean for your cash over the rest of the project.

As I don't need to tell you, billing and job progress don't always happen at the same time. You may collect a large deposit upfront, bill at certain milestones, or have quite a few costs come through before the next draw goes out.

How a WIP Schedule Works

One common way to estimate how far along a project is uses the costs you've incurred compared to the total estimated costs of the job.

For example, let's say you have a $1,000,000 contract and expect the project to cost $800,000.

If you've incurred $400,000 of those costs so far, the project would be approximately 50% complete using this method. At 50% complete, you've earned approximately $500,000 of the $1,000,000 contract.

From there, we can compare that $500,000 to how much you've actually billed the customer.

If you've billed $600,000, you're $100,000 overbilled. If you've only billed $400,000, you're $100,000 underbilled.

What Does Overbilling or Underbilling Mean for You?

Being overbilled isn't necessarily a bad thing. In fact, from a cash flow standpoint, it can be helpful because you've billed some of the project before completing that portion of the work.

The thing to keep in mind is that you can't count on that cash coming later - you need to make sure any cash you've collected is allocated to this job and not spent on something else.

Using the example above, if you've already billed $600,000 of a $1,000,000 contract, you only have $400,000 left to bill. Meanwhile, you may still have a large amount of subcontractor bills, payroll, materials and other project costs left to pay.

If the customer has already paid those invoices, your bank account may look great today; but some of that cash needs to be there to help finish the job.

Underbilling is the opposite of the above. If you've earned $500,000 based on the progress of the job but have only billed $400,000, you've done more work than you've billed the customer for.

There may be a good reason for that. Maybe the next draw hasn't gone out yet, you're waiting on a billing milestone, or there's a change order that still needs to be approved. But your company has already incurred costs to perform that work, so being underbilled for too long can put pressure on cash.

From an accounting standpoint, underbillings are generally shown as an asset, while overbillings are generally shown as a liability. You don't necessarily need to get too caught up in the accounting side of that as a business owner, but it helps explain why these amounts matter on your financial statements.

What's the goal?

At the end of the day, the goal of the WIP schedule is to help you understand where each job actually stands.

If you're overbilled, that's good information to have when you're looking at the cash in the bank and planning for the costs still coming on that project.

If you're underbilled, you may need to look at your invoicing, upcoming draws, change orders or why your costs are getting ahead of your billing.

This can be especially important when you have several projects running at the same time. One project may be heavily overbilled while another is underbilled, and each one may have a very different impact on your cash flows over the next few months.

Having your bookkeeping and job costing kept up regularly makes the WIP schedule much more useful. When your project costs, billings, receivables and payables are current, you can use the report to help prepare your cash and catch potential shortfalls before they become a bigger problem.