WIP SAYS 65 PERCENT COMPLETE. NOT ONE BEAM IS ERECTED.
A fabricate and erect contract is two businesses under one number. Fabrication uses up 65 percent of the cost before a crane reaches the site, and a cost to cost WIP schedule reads that as 65 percent of the profit earned.
On a $1.4M fabricate and erect contract with $1,078,000 of estimated cost, fabrication typically consumes about $700,000 of it. At the end of the shop phase the job is 65 percent complete on a cost to cost basis, so the WIP schedule recognises $910,000 of revenue and $208,000 of gross profit before any steel is erected. Erection bears the crane, the weather and the sequence risk, so overruns come after the profit was already recognised and surface as a final month reversal. Structural steel subs at $1M to $5M average 23 percent gross and 8 percent net before taxes.
Nothing here is a bookkeeping error and your WIP schedule is doing what it was built to do. It was built for a contract where cost and progress move together.
This post covers one WIP mechanic on one contract type. That page covers how the trade operates and where steel margin goes across a year. Read CFO for Structural Steel Contractors for the complete treatment, worked figures included.
WHY IS A STEEL CONTRACT TWO BUSINESSES?
Fabrication is a shop. Tons move through a plant on a schedule you control, labour is indoors and predictable, and the cost is mostly material and shop hours. Once the drawings are approved, fabrication is the most forecastable work a steel contractor does.
Erection is a field operation. Crews, a crane, weather, site access, other trades, and a sequence that changes when the concrete is late. It is a fraction of the cost and most of the risk.
A single subcontract covers both, and a single WIP schedule reports both. That is where it goes wrong, because the two phases have opposite cost and risk profiles and the schedule treats them as one continuous curve.
WHAT COST TO COST DOES TO THE NUMBERS.
Take a $1.4M contract. At structural steel's 23 percent gross margin the estimated cost is $1,078,000 and the estimated gross profit is $322,000. Split it the way the work splits: about $700,000 of fabrication cost and $378,000 of erection.
The shop finishes. You have incurred $700,000 against $1,078,000, which is 65 percent. Cost to cost says the job is 65 percent complete, so the WIP schedule recognises 65 percent of the contract, $910,000 of revenue, and 65 percent of the profit, $208,000. That figure goes on the schedule, into the year to date net income and onto the statement your surety reads.
Nothing is erected. No crane has reached the site. Every hour of risk in the job is still in front of you, and two thirds of the profit is already on the books.
THEN ERECTION COMES IN OVER.
Erection is where steel loses money, and it loses it in ways the shop never does. Concrete cures late so the sequence reshuffles. A pick gets re-rigged. The crane waits two days because nobody cured the slab in time. Say erection comes in 12 percent over: an extra $45,360.
Final cost is $1,123,360 and final gross profit is $276,640, a 19.8 percent job against a 23 percent bid. That is a normal outcome and not a disaster.
The reporting is the disaster. The $208,000 recognised in month three was overstated by roughly $30,000, and the entire correction appears in the closing month as a reversal. On your income statement that month, a profitable job produces a loss.
MOST SUBS MISS THIS: THE SURETY SEES THE REVERSAL.
Here is why this costs more than the $30,000. Your bonding capacity is set off your work in progress schedule and your interim statements. An underwriter reads a WIP schedule looking for one thing above all others, which is whether your estimates hold.
A job that reports 65 percent complete with strong profit in month three and then gives back $30,000 in month eight reads as an estimating problem, because from the outside that is indistinguishable from one. The underwriter cannot see that the profit was never earned in month three. He sees a company whose forecasts move.
Do that on three jobs in a year and the conversation about single job limit gets harder, and it gets harder in the year you were planning to bid bigger work. The reversal costs you capacity, and capacity costs more than margin.
HOW TO SPLIT THE WIP WITHOUT NEW SOFTWARE.
You do not need a different accounting method. You need the contract broken into two performance obligations and reported that way.
1. Split the contract value at bid into a fabrication amount and an erection amount, with their own estimated costs and their own gross margins. The estimator already has both numbers to reach the total.
2. Measure percent complete separately per phase. Fabrication on cost to cost, or on tons fabricated against tons contracted, which is better. Erection on tons erected against tons contracted, which is a physical measure a superintendent can confirm by walking the building.
3. Report them as two lines on the WIP schedule under one contract number, and total them. A reader sees fabrication at 100 percent and erection at zero, which is what happened.
4. Hold the erection contingency inside the erection phase. If you hold job contingency at the contract level, cost to cost releases it during fabrication, which is the same error one layer down.
WHAT THE SPLIT BUYS YOU.
Three things, and only one of them is accounting accuracy.
First, you stop reporting profit you have not earned, so the final month stops producing surprise reversals and your interim statements become something an underwriter can trust.
Second, you learn your two real gross margins. Most steel contractors discover fabrication comes in several points above the blended 23 percent and erection several points below, which changes how you bid the next fabricate and erect job and whether you want the erection scope at all.
Third, you can answer the question that decides whether a job was good. Structural steel at $1M to $5M averages 8 percent net profit before taxes against an 11.5 percent target, and on a $4M contractor that spread is $140,000 a year. You cannot close it while two businesses with different margins report as one number.
THE SHORT LIST.
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