Percent complete is a guess
Take percent complete from the PM's cost to complete, not from billing.
Many controllers get a percent complete from the PM that looks a lot like the percent billed. The PM bills what the GC will approve, so billing tells you about the schedule of values and not about the work. If a job is billed well beyond the work done, you've over billed it and your WIP is overstating profit. When the percent is wrong, the revenue is wrong, the bank sees the wrong WIP, and the surety sees it too.
Three moves, in order
What CFOS does about it
CFOS keeps job cost by cost code against the budget, updated every hour, and the budget comes from your estimate. At month end the PM enters the cost to complete and someone approves it. The WIP schedule then shows over and under billing for each job, and a master WIP rolls them together. Because the cost to complete is entered by the PM and approved, you can see who made the call on each job.
Who owns this: Controller.
At $25M with 40 open jobs, a controller can't second guess each PM by feel. The cost to complete entry has to be the process. Then the review has something to work from.
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Step 07: Monthly cadence
Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month.
Other problems step 07 solves
Other things that go wrong
What owners ask
How to calculate percent complete construction?
Take percent complete from the PM's cost to complete, not from billing. Many controllers get a percent complete from the PM that looks a lot like the percent billed. The PM bills what the GC will approve, so billing tells you about the schedule of values and not about the work. If a job is billed well beyond the work done, you've over billed it and your WIP is overstating profit. When the percent is wrong, the revenue is wrong, the bank sees the wrong WIP, and the surety sees it too.
Which part of the system fixes this?
The step is number 07, monthly cadence. Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month. It's drawn from chapter 7 of CONTROL: C.F.O.S. Construction Financial Operating System.
Is this normal for my trade?
Across the 48 trades that publish a figure, net profit at $1M to $5M averages 7% before taxes. If you're well under that and this page describes your month, the two are usually the same story. The published average tells you where the pack is, and your own job costing tells you where you are, which is the number that pays payroll.
Where do I start?
Require every PM to enter an estimated cost to complete on each open job at month end, by cost code, and not a percent.
Is percent complete based on cost or on billing?
For WIP it should be based on cost, meaning cost to date against the total estimated cost at completion. Billing is a separate fact that you compare against it. The difference between the two is your over or under billing.
Who should enter the cost to complete?
The project manager, because he knows what is left to buy and build. The controller reviews and approves it. If the controller enters it for the PM, you lose the accountability that makes the number worth having.
Can I fix this without touching anything else?
You can try, and it doesn't hold. Step 07 depends on step 03, overhead calculation and step 04, estimating system and step 05, software and bookkeeping alignment and step 06, project management. Install it ahead of those and it produces numbers the field won't trust, which is worse than the problem you started with.
Wrote CONTROL, the 8 step system behind these figures. More about the author.