Work on Hand and Bonding
Figuring out what Work on Hand is can be a confusing and the answer varies depending on who you are speaking to, whether it is a bookkeeper, CPA or Construction CPA.
Let’s begin with a simple and common question:
What makes up “Work on Hand” for a construction company?
Knowing how to determine your companies “Work on Hand” amount is crucial because when obtaining a bid or performance/payment bonds a surety will always set an aggregate bond capacity, and they will use your “Work on Hand” to calculate it.
These are some of the answers given when contractors are asked the above question...
All contract costs
The incomplete portion of all projects
The sum of open (undecided) bids plus the unbilled portion of all projects
The incomplete portion of all bonded projects
The unbilled portion of all bonded projects
The unbilled portion of all projects
Contract price minus costs
Original contract price minus costs incurred to date
Contract price minus approved (by architect or owner) billings
Contract price (including change orders) minus current estimate of total costs
These all sound pretty good, but unfortunately… none are correct. Let’s dive in to why.
To begin you need to know that billings are not part of the answer, even though many contractors like to use this approach.
Many contractors chose option #6: “The unbilled portion of all projects”. To rely on this approach, you depend on the project owner to pay timely based on the degree of completion. In other words, when you are 50% complete, you should be paid 50% of the contract amount. For this idea to work you must be complete with the actual work when you make your last billing to reach 100% of the contract price
The problem with this is that the project owner does not know the cost of the remaining work, which defines the degree of completion.
Challenging question: How reliable would it be to use billings to determine the WOH if the project was unprofitable? (costs exceed the contract amount)
The degree of completion and the remaining WOH are defined by cost, by accountants. The reason? The project is not complete until there are no more costs left to incur, regardless of the state of the billings. When all cost including all materials and labor cost are finished, this defines a 100% complete project.
How to formulate
WOH consists of the following:
Current estimated costs to complete on all projects, plus
The full amount of new contracts just started, plus
The full amount of undecided bids and contract proposals
In summary when we ask a contractor how the project is going, and the contractor says “The job is going well. We are already 60% billed!” We would say “Great, are your cost projections within budget?”