Looking for work in progress and retainage in plain words? Steven Palmieri, a Tax CFO, puts both into everyday words here. They are the two ideas a bank or a surety asks about, and they are the reason a profitable contractor can still run short of cash.
Take any job that is still open. Ask two questions. How much of the work is done, and how much has been billed? The answer to the first, set against the answer to the second, is the work in progress view.
Most jobs are not billed in step with the work. A contract might call for a third up front, a third at rough-in and a third at the end, while the crew finishes the job in a different rhythm. So at any moment, the billing and the work are out of line, and the gap has a name.
Over billing means you have billed more than you have done. You are holding cash that you have not yet earned. That feels good, and it is a liability, because the work still has to be done with that money.
Under billing means you have done more than you have billed. You are carrying the job on your own cash, with the customer in your debt. That feels fine until payroll comes due.
Say a landscape contract is worth $50,000 and is 60 percent done, which is $30,000 of work. If $20,000 has been billed, the job is under billed by $10,000. This is a made-up job. The owner should know that $10,000 is being carried, and should decide whether to send the next draw now.
Retainage is the share of each payment that a customer holds back until the job ends. It protects the customer, and it makes the final stretch of a job slow money. A contractor with a share held back on several jobs can have a large amount of earned cash sitting with customers. Texas law sets rules for prompt payment and for retainage on private construction. The day counts and the retainage limit come from the statute and your contract, and we do not quote them from memory.
The plan for retainage is the same as the plan for any slow cash. Know the amount, know the expected release, and make sure payroll never depends on it.
Every month, we prepare a work in progress schedule. It lists each open job with its contract value, the cost so far, the share complete, the amount billed, and whether it is over or under billed. A bank can read it. A surety can read it. And you can read it in a few minutes and spot the job that has drifted.
The schedule is prepared from your books, and no report is attached to it. When a lender needs a signed report on your statements, that comes from a licensed firm, which the page on the jobs we close and the reports we do not sign explains. Ours is the schedule that makes their work faster.
The way a contractor counts income on a long job can matter. Larger contractors may have to use the percentage of completion method, while smaller ones often do not, under a test based on gross receipts that changes from year to year. We read the current rule each year before we choose the method, and we do not quote a figure from memory.
A work in progress schedule rests on the job costing described in which jobs make money. It also feeds the bid, because a job that ties up cash for months should be priced for it. See bidding the next job.
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