Calculating Work in Progress (WIP)

Transcription

1 Calculating Work in Progress (WIP) QBCC MINIMUM FINANCIAL REQUIREMENTS WIP is about estimating the assets or liabilities accumulated from construction contracts based on what you are entitled to invoice under the contracts less what you have invoiced at a particular point in time.

2 GENERAL All applicants for, and holders of, a licence under the Queensland Building and Construction Commission Act 1991 (the QBCC Act) are required to meet the Minimum Financial Requirements (MFR) set out by the Queensland Building and Construction Commission (QBCC). The MFR requires the application of all relevant current Australian Accounting Standards to the financial information of the Licensee as well as the application of the additional requirements provided in the Minimum Financial Requirements Policy of the QBCC. A key part of the MFR is the calculation of the Licensee s Net Tangible Assets (NTA). NTA is calculated using the following formula: NTA = Assets Liabilities Intangible Assets Disallowed Assets. Assets is defined in the MFR as meaning assets owned both legally and beneficially by the entity (that is, it does not include assets which are held on trust for another person or corporation) and includes but is not limited to the following: a) Cash; b) Construction Contract Work In Progress [but only that portion that is an asset]; c) Debtors (if collectible); d) Inventory; e) Investments (if collectible); f) Investments valued using equity accounting methodology only where included in general purpose financial statements; g) Motor vehicles; h) Plant and equipment at written down value; i) Real estate; j) Related Entity loans and investments (only if assessed as collectible); k) Shares in publicly listed companies; l) Tools of trade. Disallowed Assets is defined in the MFR as including the following: a) Assets not assessed as collectible; b) Boats, ships, jet skis, planes, helicopters, race horses and racing cars; c) Collectors items (e.g. paintings, stamps, coins); d) Contingent assets; e) Furniture (personal); f) Investments or shares in companies that are not publicly listed companies; g) Investments valued using equity accounting methodology where included in special purpose financial statements; h) Trade or barter dollars and any equivalent scheme; i) Trust assets; j) Units in trusts that are not publicly listed;

3 k) Unvested superannuation benefits; l) Life or income protection insurance policy benefits. Liabilities is defined in the MFR as meaning all debts or obligations which are allowed by an Applicant, or Licensee, which are payable on demand, legally enforceable or a statutory requirement. Liabilities include all amounts owed by the Licensee to any Related Entities, and any deficiency in trusts for which the Licensee is Trustee. Where a Licensee has received notification of a breach of banking or loan covenants the full amount of the loan or finance facility is classified as a current liability until such time as the lender has waived their rights in relation to the breach. Construction Contract Work in Progress that is less than zero should also be included here as a liablity. CONSTRUCTION CONTRACT WORK IN PROGRESS A key element of a Licensee s NTA is the calculation of the Construction Contract Work in Progress (WIP). This term is defined in the MFR as meaning revenue and costs associated with construction contracts. Construction contract work in progress is to be valued in accordance with AASB 111, Construction Contracts. The AASB 111 Construction Contracts is an Australian Government Accounting Standard which sets out in detail how to calculate WIP. As WIP is a critical item that is often included in a licensee s NTA calculation, it is imperative that builders and accountants understand how to calculate this item correctly. Because WIP requires consideration of both money received and money paid out, it may be an asset or a liability on any particular project depending on how the project is progressing and whether you have over- or under-billed your client at the time of your review. In order to ensure the financial success of your business, it is important that you understand how profitable each project is at all times. Despite this, WIP is one of the most poorly understood terms in the construction industry. Both builders and accountants often misunderstand what the term means and how to calculate it. In order to assist its members, Master Builders has prepared this paper which provides a simplified method of calculation for WIP. This paper is based on a bottom line business position and not an accounting reporting position i.e. the figures that your accountant includes in your financial reports for the ATO are not considered in this paper. The words work in progress may also mean completely different things to different companies. It is important that a Licensee understands what the term means in the Licensee s business accounting system so that it can report the figures correctly to the QBCC and its accountant. In this paper, Master Builders has assumed that a Licensee reports its cash at bank (or money received to date) as part of its assets and, hence, WIP, in this paper, is based on what additional money the Licensee has earned but not yet invoiced or what costs the Licensee has still to incur to align with the amount invoiced. The review of the performance of your projects should be undertaken on a regular basis e.g. 3 monthly, and not just at the end of the QBCC reporting period. If you do not regularly review your financial position, you will lose the opportunity to change it before it is too late. WIP should be calculated for each project and the overall position will determine if the WIP is recorded as an asset or a liability in the NTA calculation. WIP AS AN ASSET If you have under-billed your client, then you need to recognise that you are entitled to invoice an additional amount to align with the progress achieved to date i.e. this is an additional asset. Worked Example 1 Consider Job 4 in the Worked Example Table below. The progress to date is 81% (column F). The Contract Price is $232,000 (column A). Therefore, we are entitled to invoice 81% of $232,000 = $187,920 (column H) but we have only invoiced $150,800 to date (column G) so we are entitled to invoice an additional $37,120. Therefore, our WIP is $37,120 (column I) which is an asset.

4 WIP AS A LIABILITY If you have over-billed your client, then you need to recognise that you are obligated to incur further costs to achieve the level of completion that you have invoiced your client for. Worked Example 2 Consider Job 10 in the Worked Example Table below. The progress to date is 13% (column F). The Contract Price is $225,902 (column A). Therefore, we are entitled to invoice 13% of $225,902 = $29,367 (column H) but we have invoiced $67,771 to date (column G) so we have over invoiced $38,404. Therefore, our WIP is -$38,404 (column I) which is a liability. RECOGNISING LOSS IMMEDIATELY The issue that often arises, however, under construction contracts is that a project may not be progressing as well as initially expected and may, in fact, be heading for a loss. The builder is required to immediately recognise that loss in its calculation of NTA. The builder is not permitted to leave the loss out of his calculations in the hope that the project ends better than expected. This is, by far, the most important calculation of any that a builder will do as it is the only real assessment of the financial position of a project. In order to determine the financial position of a project at any particular point in time, it is necessary for the builder to calculate the estimated cost at completion and compare that to the contract sum plus any approved variations. This calculation will determine whether the project will make a profit or whether it is heading for a loss. Once the builder understands this, he has the ability to manage the performance of the project from now until the completion of the contract. If the builder does not understand this, he will miss the opportunity to change the expected outcome of the project. Worked Example 3 Consider Job 8 in the Worked Example Table below. The Contract Price is $230,596 (column A). We have incurred costs to date of $210,500 (column B) and expect to incur an additional $56,000 (column C) to complete the project. This will result in a cost at completion of $266,500 (column D) which will ultimately result in a loss of $35,904 (column E) for this project. This expected loss must be recorded as a liability. SO WHAT DOES ALL OF THIS MEAN FOR ME? If the overall WIP for the business is a positive (i.e. add up WIP for all projects that are unfinished at the time of the review), then the WIP can be recorded as an additional asset in the NTA calculation. However, if the overall WIP for the business is a negative, then the WIP must be recorded as an additional liability in the NTA calculation. Additionally, if a project is expected to make a loss at the end of the project, then that estimated loss must also be recorded as an additional liability in the NTA calculation. If the above calculations are undertaken by the Licensee regularly, the Licensee will have a good understanding of the true financial position of any particular project and, therefore, the true financial position of the business. It is only with knowledge and understanding that the Licensee is able to make sound commercial decisions about the future of the business. If the above calculations are not undertaken correctly and regularly, the Licensee has little opportunity to make good decisions and is at great risk of running the business into the ground. All of the information in the Worked Example Table below will be needed to determine the assets and liabilities in order to calculate the NTA of the Licensee. If the NTA of a Licensee is less than Nil i.e. liabilities are greater than assets, then the QBCC has the power to suspend or cancel the Licensee s licence. Further, if the NTA of the Licensee falls below what the applicable licence category requires, the QBCC has the power to suspend or cancel the Licensee s licence. If a Licensee s NTA decreases by more than 30% from the amount previously provided to the QBCC, then a new declaration must be provided to the QBCC within 30 days of the decrease occurring. If the Licensee does not advise the QBCC within that timeframe, the Licensee is in breach of a condition of its licence.

5 WORKED EXAMPLE TABLE Job number Client Contract Price Cost to Date Costs to Complete Costs at Completion Profit Progress Invoiced to date Entitled to invoice A B C D = B + C E = A - D F = B / D G H = F * A I = H - G WIP Comments 1 M $233,405 $178,749 $55,000 $233,749 -$344 76% $220,000 $177,388 -$42,612 over billed 2 N $230,879 $191,365 $4,883 $196,248 $34,631 98% $196,247 $226,261 $30,014 under billed 3 O $228,602 $166,484 $27,827 $194,311 $34,291 86% $194,312 $196,598 $2,286 under billed 4 P $232,000 $159,903 $37,297 $197,200 $34,800 81% $150,800 $187,920 $37,120 under billed 5 Q $217,415 $157,604 $27,198 $184,802 $32,613 85% $192,593 $184,803 -$7,790 over billed 6 R $228,073 $175,000 $49,000 $224,000 $4,073 79% $189,000 $180,178 -$8,822 over billed 7 S $228,073 $141,043 $52,819 $193,862 $34,211 73% $148,247 $166,493 $18,246 under billed 8 T $230,596 $210,500 $56,000 $266,500 -$35,904 88% $149,888 $202,924 $53,036 under billed 9 U $230,345 $150,666 $45,128 $195,794 $34,551 77% $149,725 $177,366 $27,641 under billed 10 V $225,902 $25,000 $167,017 $192,017 $33,885 13% $67,771 $29,367 -$38,404 over billed TOTAL $2,285,290 $206,807 $70,715 Costs to Complete are determined by either calculating: work yet to be done; or work completed to date compared to what was expected at the time of tender. DO NOT BASE THE ESTIMATED COSTS TO COMPLETE ON THE COSTS INCURRED TO DATE. This will invariably lead to an underestimation of the costs needed to complete the project. Page 5 of 5