Advanced WIP Analysis & Financial Controls

Document Type: Advanced Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controllers, Senior Project Managers
Complexity: Enterprise-level

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Purpose

Provide sophisticated Work in Progress analysis methodologies for enterprise contractors, including Earned Value Management, variance analysis, and financial forecasting aligned with CFMA best practices.

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Beyond Basic WIP: Enterprise Financial Management

For billion-dollar contractors, WIP isn't just about tracking jobs—it's about:

• Predictive financial management
• Bonding capacity optimization
• Cash flow engineering
• Risk-adjusted forecasting
• Audit-ready documentation
• ASC 606 compliance

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Earned Value Management (EVM) Integration

Core EVM Metrics:

Metric	Formula	What It Tells You
BCWS (Budgeted Cost of Work Scheduled)	Planned value at reporting date	What should have been done
BCWP (Budgeted Cost of Work Performed)	Earned value	What was actually accomplished
ACWP (Actual Cost of Work Performed)	Actual costs incurred	What it actually cost

Performance Indices:

Index	Formula	Interpretation
CPI (Cost Performance Index)	BCWP ÷ ACWP	over 1.0 = under budget
SPI (Schedule Performance Index)	BCWP ÷ BCWS	over 1.0 = ahead of schedule
TCPI (To-Complete Performance Index)	(BAC - BCWP) ÷ (EAC - ACWP)	Required efficiency to finish on budget

EVM Forecasting:

EAC (Estimate at Completion):

Method 1 - Current Variance:
EAC = ACWP + (BAC - BCWP)
Use when: Current variance is atypical

Method 2 - Current CPI:
EAC = BAC ÷ CPI
Use when: Current performance will continue

Method 3 - CPI × SPI:
EAC = ACWP + [(BAC - BCWP) ÷ (CPI × SPI)]
Use when: Schedule impacts cost (most common in construction)

VAC (Variance at Completion):
VAC = BAC - EAC
Positive = projected profit increase
Negative = projected profit fade

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Variance Analysis Framework

Cost Variance Decomposition:

Total Cost Variance = Price Variance + Quantity Variance + Mix Variance

Labor Variance:
├── Rate Variance = (Actual Rate - Budget Rate) × Actual Hours
├── Efficiency Variance = (Actual Hours - Budget Hours) × Budget Rate
└── Mix Variance = (Actual Mix - Budget Mix) × Budgeted Rates

Material Variance:
├── Price Variance = (Actual Price - Budget Price) × Actual Quantity
└── Usage Variance = (Actual Qty - Budget Qty) × Budget Price

Subcontract Variance:
├── Scope Variance = Changes from original scope
├── Price Variance = Buy-out savings or overruns
└── Performance Variance = Backcharges, extras

Monthly Variance Report:

Category	Budget	Actual	Variance	%	Root Cause	Corrective Action
Labor
Material
Equipment
Subcontract
GCs
TOTAL

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CFMA Financial Benchmarks

Industry KPIs (Per CFMA Annual Survey):

Metric	Top Quartile	Median	Bottom Quartile
Gross Profit Margin	over 18%	14%	under 10%
Net Profit Margin	over 5%	2.5%	under 1%
Working Capital / Revenue	over 12%	8%	under 5%
Current Ratio	over 1.5	1.2	under 1.0
Debt to Equity	under 1.0	2.0	over 3.0
Backlog / Annual Revenue	0.8-1.2x	Varies	-
Revenue per Employee	over $400K	$275K	under $200K

Project-Level Benchmarks:

Metric	Target	Warning	Critical
Margin Fade (Monthly)	under 1%	1-3%	over 3%
Under-billing %	under 10%	10-20%	over 20%
Over-billing %	under 15%	15-25%	over 25%
Change Order %	under 5%	5-10%	over 10%
Schedule Variance	±5%	5-15%	over 15%

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Profit Fade Analysis

Fade Tracking Model:

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              PROFIT FADE ANALYSIS
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Project: ___________________  Period: ______________________

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| Period | EAC | Change | Cumulative | Cause Code | Action |
|--------|-----|--------|------------|------------|--------|
| Original | | - | - | - | - |
| Month 1 | | | | | |
| Month 2 | | | | | |
| ... | | | | | |

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CAUSE CODES:
A = Labor productivity
B = Material price increase
C = Scope creep (unrecovered)
D = Design errors/omissions
E = Weather/force majeure
F = Subcontractor issues
G = Equipment
H = Schedule acceleration
I = Estimating error (original)
J = Other (specify)

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FADE THRESHOLD ALERTS:

☐ Single period fade over 3% of margin
☐ Cumulative fade over 10% of margin
☐ Margin now below company average
☐ Margin now below bonding threshold
☐ CPI trending below 0.95

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Fade Prevention Strategies:

Fade Cause	Leading Indicators	Intervention
Labor productivity	Hours exceeding plan	Crew analysis, re-sequence
Material escalation	Market trends, quotes	Lock pricing, escalation clauses
Scope creep	Undocumented directions	Strict change order process
Design errors	High RFI count	Design review, protective notices
Schedule delays	Critical path slippage	Recovery schedule, acceleration

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Cash Flow Engineering

Project Cash Flow Projection:

Month:           1      2      3      4      5      6
─────────────────────────────────────────────────────
Revenue Billed:  $___   $___   $___   $___   $___   $___
- Retention:     $___   $___   $___   $___   $___   $___
Collections:     $___   $___   $___   $___   $___   $___

Direct Costs:    $___   $___   $___   $___   $___   $___
- AP Terms:      $___   $___   $___   $___   $___   $___
Disbursements:   $___   $___   $___   $___   $___   $___

Net Cash Flow:   $___   $___   $___   $___   $___   $___
Cumulative:      $___   $___   $___   $___   $___   $___

Financing Need:  $___   $___   $___   $___   $___   $___

Cash Flow Optimization:

Strategy	Impact	Risk
Front-load SOV	Improves early cash	Over-billing position
Negotiate better payment terms	Faster collections	Client relationship
Stretch AP (within terms)	Delays outflows	Supplier relationship
Subcontract strategically	Shifts timing	Less control
Mobilization payments	Early cash	Contractual

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Bonding Capacity Impact

WIP Effect on Bonding:

Working Capital Calculation:
Current Assets - Current Liabilities = Working Capital

WIP Impact:
+ Under-billings (asset)
- Over-billings (liability)
= Net WIP position

Bonding Rule of Thumb:
Single Job Capacity ≈ 10-15× Working Capital
Aggregate Capacity ≈ 20-25× Working Capital

Over-billing Warning:
Excessive over-billing reduces working capital
→ Reduces bonding capacity
→ May trigger surety review

Surety Reporting Requirements:

• Quarterly WIP reports
• Aged under-billing analysis
• Fade explanation for significant changes
• Backlog report
• Cash flow projections

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ASC 606 Revenue Recognition

Five-Step Model Application:

1. Identify the contract - Enforceable rights and obligations
2. Identify performance obligations - Distinct goods/services
3. Determine transaction price - Including variable consideration
4. Allocate transaction price - To performance obligations
5. Recognize revenue - When/as obligations satisfied

Construction-Specific Considerations:

Issue	Treatment
Change orders	Variable consideration - constrain estimate
Claims	Only include if highly probable
Liquidated damages	Reduce transaction price
Incentive payments	Include if highly probable
Unpriced change orders	Evaluate probability of recovery

Variable Consideration Constraint:

Include variable consideration only to extent it is "highly probable" that significant reversal will NOT occur.

For pending change orders/claims:

• Approved and priced → Include
• Approved, price pending → Include if highly probable
• Submitted, not approved → Generally exclude
• Claims → Exclude until resolved (conservative)

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Multi-Project Portfolio Analysis

Portfolio Dashboard:

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           PROJECT PORTFOLIO SUMMARY
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Period: ____________  Total Projects: _______

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BY PROFITABILITY:
Margin over 15%:    ___ projects  $___ value  ___% of portfolio
Margin 10-15%:  ___ projects  $___ value  ___% of portfolio
Margin 5-10%:   ___ projects  $___ value  ___% of portfolio
Margin 0-5%:    ___ projects  $___ value  ___% of portfolio
Margin under 0%:     ___ projects  $___ value  ___% of portfolio

BY BILLING STATUS:
Net Under-billed: $____________
Net Over-billed:  $____________

BY STAGE:
0-25% Complete:   ___ projects  $___ remaining
25-50% Complete:  ___ projects  $___ remaining
50-75% Complete:  ___ projects  $___ remaining
75-100% Complete: ___ projects  $___ remaining

WATCH LIST (Margin Fade over 5%):
1. ____________________________________________
2. ____________________________________________
3. ____________________________________________

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Internal Controls

WIP Review Controls:

Control	Frequency	Owner	Documentation
PM estimate certification	Monthly	PM	Signed WIP
Controller review	Monthly	Controller	Review notes
Executive review	Monthly	CFO/COO	Meeting minutes
External audit	Annual	CPA	Audit workpapers
Surety review	Quarterly	CFO	Surety package

Estimate Update Requirements:

• Documented basis for cost to complete
• Reconciliation of pending change orders
• Productivity analysis supporting labor estimates
• Material commitment log
• Subcontractor status and exposure

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Related Documents

• Basic WIP Reporting
• Job Cost Reporting
• Cash Flow Management
• Bonding Guide

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References

• CFMA Construction Financial Management Manual
• AACE International Recommended Practices
• ASC 606 Revenue from Contracts with Customers
• AGC/CFMA Financial Management Guide

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Template provided by support.construction. Enterprise-level financial management for sophisticated contractors.