When it comes to managing a contract account, calculating work in progress (WIP) is an essential part of the process. WIP refers to the value of work that has been started but not yet completed, and accurately calculating it is crucial for maintaining financial stability and understanding the progress of a project. Here’s how to calculate WIP in a contract account.
Step 1: Determine the Contract Price
The first step in calculating WIP is to determine the contract price, which is the total amount the customer will pay for the work to be completed. This should be clearly outlined in the contract agreement and includes all approved change orders and any other adjustments.
Step 2: Calculate the Total Cost of the Project
Next, you need to determine the total cost of the project to date. This includes all costs associated with the project, such as labor, materials, and any other direct or indirect costs. Make sure to include all costs associated with change orders and any other adjustments.
Step 3: Calculate the Percentage of Completion
To calculate the percentage of completion, you need to determine how much of the project has been completed to date. This can be done in a number of ways, including by physical completion, cost completion, or a combination of both. Once you’ve determined the percentage of completion, you can use it to calculate the WIP.
Step 4: Calculate the WIP
To calculate the WIP, multiply the percentage of completion by the contract price, and then subtract the total cost of the project to date. Here’s the formula:
WIP = (Percentage of Completion x Contract Price) – Total Cost of the Project
For example, if the contract price is $100,000, the total cost of the project to date is $60,000, and the percentage of completion is 60%, the WIP is:
WIP = (60% x $100,000) – $60,000
WIP = $60,000 – $60,000
WIP = $0
This means that the WIP is zero, which indicates that the project is on track and there is no need for any adjustments.
Calculating WIP in a contract account is an essential part of the project management process. By following these steps, you can accurately determine the value of work that has been started but not yet completed, which can help you maintain financial stability and track the progress of the project.