Presented by Ono & Chen CPA’s, LLC

August 1 2013August 1,2013

Full service CPA firm specializing in the construction industry.

f l Over 90% of our clients are in construction and/or are government contractors.

We believe in educating our clients and working with our clients to provide ONLY theworking with our clients to provide ONLY the services you need.

I. Understanding the Percentage-of-Completion Method of Acco ntingCompletion Method of Accounting

II. Defining the WIP ScheduleIII Key Components/Formulas of the WIPIII. Key Components/Formulas of the WIP

ScheduleIV *Break*IV. BreakV. Detailed WIP Schedule ExamplesVI Common WIP Schedule Errors &VI. Common WIP Schedule Errors &

Surety/Bank Considerations

Investopedia definition: An accounting method in which the revenues and expenses of long term contracts areexpenses of long-term contracts are recognized yearly as a percentage of the work completed during that yearwork completed during that year.

It is an accounting method similar to the It is an accounting method similar to the cash or accrual method of accounting.

Most accurate way to measure revenues on Most accurate way to measure revenues on uncompleted contracts.

Recognized by GAAP (generally accepted accounting principles).

Most importantly, most sureties require financials statements based on this method for bonding purposes.

A) The WIP Schedule should only be preparedA) The WIP Schedule should only be prepared once a year on the ‘CPA-prepared’ financial statements.statements.

B) The WIP Schedule should only be prepared whenever ‘in-house’ financial statements are submitted to third parties.

C) The WIP Schedule should only be prepared h d b /b kwhenever requested by surety/banks.

D) None of the above.

D) None of the above)

But WHY??But WHY??

It is a supplementary schedule within the financial statements of a construction contractor (using the percentage-of-completion method) that shows a financialcompletion method) that shows a financial snapshot of a contractor’s uncompleted contracts at a specified time periodcontracts at a specified time period.

The WIP schedule may be required by your The WIP schedule may be required by your surety/banks on a monthly, quarterly, semi-annual, or annual basis.

COST DRIVES REVENUES!!

Current contract price (including change Current contract price (including change orders)

Total estimated contract cost

Cost incurred to date (from inception)

Billings to date

Estimated gross profit on completed contract

Gross profit percentage

Percentage complete

Revenues earned to date

Gross profit to date

Formula: Current contract price minusFormula: Current contract price minus total estimated contract cost.

Example: If you sign a contract for $600,000 and you estimate that your total costs will be $400,000, what is your estimated gross profit?

Answer: $200,000

Formula: Estimated gross profit divided b t t t iby current contract price

Example: Using previous example (contract Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200,000), what is your gross profit percentage?

Answer: 33 1/3%

Formula: Cost incurred to date divided by total estimated contract costby total estimated contract cost

Example: Using previous example (contract Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200 000) if i d d i$200,000), if your cost incurred to date is $20,000 on this job, what is your percent complete on this job?p j

Answer: 5%

Formula: Percent complete times current contract price

Example: Using previous example (contract price of $600,000, cost incurred to date of $20 000 t l t f 5%) h h$20,000, percent complete of 5%), how much of your revenues have you earned to date?

Answer: $30,000

Formula: Revenues earned to date d dminus cost incurred to date

l l ( Example: Using previous example (percent complete of 5%, revenues earned to date of $30 000 cost incurred to date of $20 000)$30,000, cost incurred to date of $20,000),what is your gross profit to date?

Answer: $10,000

Ono & Chen Builders secures a job with the Hawaii DOT on 10/1/12 with the followingHawaii DOT on 10/1/12 with the following values:

◦ Contract signed for $500,000

◦ Project manager expects job will cost $250,000

◦ As of 12/31/12 $50 000 of materials have been◦ As of 12/31/12, $50,000 of materials have been purchased for the job

Estimated Gross Profit

Gross Profit Percentage

Percent Complete as of 12/31/12

Revenues Earned to Date as of 12/31/12

Gross Profit to Date as of 12/31/12

Estimated Gross Profit = $250,000

Gross Profit Percentage = 50%

Percent Complete as of 12/31/12 = 20%

Revenues Earned to Date as of 12/31/12 = $100,000

Gross Profit to Date as of 12/31/12 = $50,000

f d b ll d Sometimes referred to as overbillings and underbillings, it is the difference between revenues earned to date and amount billed torevenues earned to date and amount billed to date to the customer.

These accounts are balance sheet accounts and are an offset against revenues.◦ Cost in Excess of Billings is an asset◦ Billings in Excess of Cost is a liability

Ono & Chen Builders has earned $100,000 of revenues as of 12/31/12 on a soleof revenues as of 12/31/12 on a sole source contract with the Navy and has billed the Navy $50,000 as of 12/31/12.the Navy $50,000 as of 12/31/12.

Ono & Chen Builders has underbilled the Ono & Chen Builders has underbilled the Navy and must record the following journal entry on 12/31/12:◦ DEBIT: Cost in Excess of Billings $50,000◦ CREDIT: Revenues $50,000

Ono & Chen Builders has earned $100 000 f f 12/31/12$100,000 of revenues as of 12/31/12 on an IDIQ contract with the Army buthas billed the Army $130,000 as of y $ ,12/31/12.

O & Ch h bill d th A Ono & Chen has overbilled the Armyand must record the following journal entry:entry:◦ DEBIT: Revenues $30,000◦ CREDIT: Billings in Excess of Cost $30,000

Note: The journal entries for ‘Cost in fExcess of Billings’ and ‘Billings in Excess

of Costs’ are very important. These t i di tl ff tentries directly offset revenues.

1. Calculation errors and missing cells

2. Estimated total cost not adjusted with change orders and other adjustments

3. Accrued expenses not recorded

4 Job losses not recognized in its entirety as an4. Job losses not recognized in its entirety as an expense once calculated

5 Incorrect ‘cost in excess’ and ‘billings in excess’5. Incorrect cost in excess and billings in excess journal entries

1. Gross profit by jobs

2. Underbillings – Indicative of a larger issue?

f d3. Poor fade!

4. Cash flow4. Cash flow

5. Distributions to owners and debt

6. Timely financial reporting

Job 1 Job 2 Job 3 Job 4 Job 5 Total

Original Contract Price 1,250,000.00 1,500,000.00 1,375,000.00 750,000.00 500,000.00 5,375,000.00 Amended Contract Price 1,425,000.00 5,425,000.00

Cost of Good SoldDirect Materials 150,000.00 240,000.00 300,000.00 9,000.00 30,000.00 729,000.00 Direct Labor 300,000.00 420,000.00 600,000.00 60,000.00 17,000.00 1,397,000.00 Direct Labor Burden 90,000.00 126,000.00 180,000.00 18,000.00 5,100.00 419,100.00 Direct Equipment 66,000.00 18,000.00 12,000.00 3,000.00 - 99,000.00 Direct Subcontractors 120,000.00 12,000.00 36,000.00 240,000.00 - 408,000.00 General Excise Tax 56,250.00 60,750.00 63,000.00 13,500.00 3,375.00 196,875.00

Total COGS 782,250.00 876,750.00 1,191,000.00 343,500.00 55,475.00 3,248,975.00

Gross Profit 467,750.00 623,250.00 184,000.00 406,500.00 444,525.00 2,126,025.00

Total COGS 782,250.00 876,750.00 1,191,000.00 343,500.00 55,475.00 3,248,975.00 Total Indirect Costs 69,148.17 96,807.44 138,296.35 13,829.63 3,918.41 322,000.00 Total Costs per Job 851,398.17 973,557.44 1,329,296.35 357,329.63 59,393.41 3,570,975.00 Estimated Cost to Complete - - 50,000.00 400,000.00 290,606.59 3,892,975.00 Estimated Total Cost 851,398.17 973,557.44 1,379,296.35 757,329.63 350,000.00 4,311,581.59

Original Estimated Total Cost 900,000.00 850,000.00 1,150,000.00 700,000.00 350,000.00 3,950,000.00 Percentage of Completion 100% 100% 96% 47% 17%

Total Gross Profit 398,601.83 526,442.56 45,703.65 (7,329.63) 150,000.00 1,113,418.41

Total Billed 1,250,000.00 1,350,000.00 1,400,000.00 300,000.00 75,000.00 4,375,000.00

Total Paid 1,250,000.00 1,000,000.00 1,000,000.00 150,000.00 75,000.00 3,475,000.00

A/R - 350,000.00 400,000.00 150,000.00 - 900,000.00

Loss TakenChange in estimated total cost

Indirect Costs Job 1 Job 2 Job 3 Job 4 Job 5Insurance 25,000.00 Equipment Rental 125,000.00 Direct Labor 300,000.00 420,000.00 600,000.00 60,000.00 17,000.00 1,397,000.00 Rent - Shop 62,500.00 21% 30% 43% 4% 1% 100%Repair and Maintanence 9,500.00 Indirect labor 62,000.00 Total Indirect 69,148.17 96,807.44 138,296.35 13,829.63 3,918.41 322,000.00 Indirect labor burden 38,000.00

Total Indirect Costs 322,000.00

General & Administrative Journal Entry for Indirect CostsSalaries and Wages - Admin 250,000.00 Other Direct Cost - Job 1 4520 69,148.17 Payroll Burden 75,000.00 Other Direct Cost - Job 2 4520 96,807.44 Office Supplies 37,500.00 Other Direct Cost - Job 3 4520 138,296.35 Rent - Office 50,000.00 Other Direct Cost - Job 4 4520 13,829.63 Utilities 6,000.00 Other Direct Cost - Job 5 4520 3,918.41 25,000.00 Depreciation 8,100.00 Insurance 5040 125,000.00 Advertising 3,600.00 Equipment Rental 5036 62,500.00 Meals and Entertainment 6,000.00 Rent - Shop 5046 9,500.00

Total G&A 436,200.00 Repair and Maintenance 5035 62,000.00 Indirect Labor 5005 38,000.00 Indirect Labor Burden 5006To record indirect cost to jobs

Customer Job No.

Contract Price Ending Prior

Month

Contract Price Change

in Current Month

Contract Price Ending Current

Month Total Estimated

Cost

Estimated Gross Profit

(Loss) GP % Costs Incurred to

Date % Compl Revenue Earned

to Date Gross Profit to

Date Progress Billings

to Date Paid to Date

Costs & Est. Earnings In

Excess of Billing

Billings In Excess of Costs

& Est. Earn A/R WIP

Job 2 12-02 1,500,000.00 - 1,500,000.00 973,557.44 526,442.56 35.10% 973,557.44 100.00% 1,500,000.00 526,442.56 1,350,000.00 1,000,000.00 150,000.00 - 350,000.00 Job 3 12-03 1,375,000.00 50,000.00 1,425,000.00 1,379,296.35 45,703.65 3.21% 1,329,296.35 96.37% 1,373,343.23 44,046.88 1,400,000.00 1,000,000.00 - (26,656.77) 400,000.00

Job 4 12-04 750,000.00 - 750,000.00 757,329.63 (7,329.63) -0.98% 357,329.63 47.18% 353,871.30 (3,458.33) 300,000.00 150,000.00 53,871.30 - 150,000.00

Job 5 12-05 500,000.00 - 500,000.00 350,000.00 150,000.00 30.00% 59,393.41 16.97% 84,847.73 25,454.32 75,000.00 75,000.00 9,847.73 - -

Sub Total 4,125,000.00 50,000.00 4,175,000.00 3,460,183.42 714,816.58 2,719,576.83 3,312,062.26 592,485.43 3,125,000.00 2,225,000.00 213,719.03 (26,656.77) 900,000.00

Completed ContractsJob 1 12-01 1,250,000.00 - 1,250,000.00 851,398.17 398,601.83 31.89% 851,398.17 100.00% 1,250,000.00 398,601.83 1,250,000.00 1,250,000.00 - - -

Sub Total 1,250,000.00 - 1,250,000.00 851,398.17 398,601.83 851,398.17 1,250,000.00 398,601.83 1,250,000.00 1,250,000.00 - - -

Total 5,375,000.00 50,000.00 5,425,000.00 4,311,581.59 1,113,418.41 3,570,975.00 4,562,062.26 991,087.26 4,375,000.00 3,475,000.00 213,719.03 (26,656.77) 900,000.00

Loss recognized immediately: (7,329.63)

Loss recognized (automatically) on WIP (3,458.33)

AJE to recognize additional loss (provision) (3,871.30)

Adjusting Journal Entry

Loss on contract (COGS) 4550 3,871.30 Provision for Losses (liability) 2070 3,871.30

To record loss on contract

Costs and estimated earnings in excess of billings on uncompleted contracts (asset) 1120 213,719.03 Billings in excess of costs and estimated earnings on uncompleted contracts (liability) 2060 26,656.77 Revenue 4000 187,062.26

To true up revenue for over/under billings