The WIP formula explained,
line by line, honestly.

Work-in-progress reporting answers one question. Has a builder billed ahead of the work or behind it. The method most residential builders use to answer it is the cost-based percentage-complete method, and the arithmetic behind it is standard, uncontested construction accounting. This page is the mechanics of that arithmetic, and it sits under the construction WIP reporting hub, which frames why the position matters across a whole portfolio. Treat this node as the engine room, the exact lines of the calculation, and the hub as the map.

The whole method is three steps of plain arithmetic. Percentage complete equals cost to date divided by forecast final cost. Earned revenue, also called revenue to date or earned value, equals that percentage multiplied by the contract value including approved variations. Over or under-billing equals billed to date minus earned revenue, a positive number meaning over-billed and a negative number meaning under-billed. Nothing in it is harder than a percentage and a subtraction, which is exactly why the difficulty lives entirely in the inputs rather than the formula.

Why it matters

The output of this calculation is the difference between a job that looks profitable and a job that is profitable. An over-billed position hands a builder cash that is really a liability, work still owed, and an under-billed position hides revenue already earned while starving the job of the cash flow it needs. The formula is what turns a stack of claims and costs into a straight answer about which side of the work the billing is sitting on, and it is only useful if it is run on current numbers.

The formula is the calculation at the centre of the wider WIP discipline described in the WIP reporting hub. It takes two cost inputs and one revenue input and produces the billing position. Its first input, cost to date, is the running actuals total that day-to-day cost tracking keeps current. Its second input, forecast final cost, is built from actuals, committed costs and an honest price on the remaining work, which is the subject of forecast final cost and of the cost to complete that feeds it.

Downstream, the formula produces the two states a WIP report exists to name, which the over-billing versus under-billing reference covers in full. The revenue side depends on the contract value carrying approved variations and only approved variations, which is why variations and the tracking of committed costs both feed the accuracy of the number. Get any one of those inputs wrong and the arithmetic still runs perfectly, it just answers a different question than the one the builder asked.

The operator's observation about the WIP formula is that it is primary school arithmetic and still routinely wrong, and the reason is not the maths. It is that both inputs lie, and they lie in predictable directions. Cost to date is understated whenever supplier invoices are running late, because the work is done but the paperwork that records its cost has not arrived. Forecast final cost is understated by optimism, because the person forecasting wants the job to land on budget and the budget figure is already sitting on the page. Neither error requires anyone to be dishonest.

The dangerous part is what happens when both errors run at once. A cost to date that is too low and a forecast final cost that is also too low do not cancel out. They combine, and two understated inputs can make a job that is quietly fading read as comfortably on-budget. The percentage complete looks sensible, the earned revenue looks sensible, and the billing position looks fine, right up until the late invoices land and the forecast is finally walked honestly. The formula did exactly what it was told. It was told a flattering story by both of its inputs.

So the fix is never a better formula. There is no cleverer arithmetic waiting to rescue a WIP position built on stale costs and a wishful forecast. The fix is honest inputs, supplier invoices processed as they arrive so cost to date is current, and a forecast final cost that has been walked line by line rather than rolled forward untouched. This is the admin shift that quietly eats a builder's week, days on the tools and nights reconciling the numbers the systems should have held, and it is exactly the work that decides whether the formula tells the truth.

Where software fits the workflow

Traditionally the WIP calculation is a spreadsheet rebuilt each month, cost to date pulled from the accounting file, forecast final cost re-typed from memory, billed to date gathered from the claims folder. Because the inputs are assembled by hand, they are stale by the time the arithmetic runs. In VIABUILD, cost tracking holds budget, committed, actual and forecast against every cost code as the job runs, and Oryn™ reads and codes supplier invoices as they arrive, so cost to date is current rather than weeks behind. The formula stays the same trivial arithmetic; the difference is that it is run on numbers that are actually true today.

The WIP formula is standard construction accounting arithmetic rather than a legislated method, but how its output is used sits inside a regulated and advised environment. The points below are labelled by evidence class; treatments and requirements differ by business and by adviser, so confirm anything touching your accounts against the current source.

• Common practice. The cost-based percentage-complete method, cost to date over forecast final cost, is the approach most Australian residential builders and their accountants use to derive a WIP position. It is chosen for the reason that its inputs already exist in the job ledger, not because it is the most physically accurate measure of progress.
• Professional recommendation. Where the cost-based percentage is likely to mislead, materials delivered ahead of installation, front-loaded costs, remeasured scope, a physical or milestone assessment of completion is commonly recommended as a cross-check. Running the two side by side and explaining any gap is more robust than trusting a single number.
• Common practice. WIP schedules built on this formula are what accountants, financiers and home warranty eligibility assessments commonly ask a builder to produce. The quality of the two cost inputs decides whether those schedules survive scrutiny, which is why keeping cost to date and forecast final cost current is a commercial matter, not just a bookkeeping one.
• Professional recommendation. Whether and how earned revenue becomes recognised revenue in the accounts is a revenue-recognition question and an accounting treatment, not a formula. Keep the calculation on this page as a management view, and take the recognition question to the builder's accountant rather than to a web page.

Illustrative only, not a benchmark, and the figures are round dollars chosen to make the arithmetic easy to follow. A custom home is contracted at $800,000, made up of an original contract sum of $760,000 plus $40,000 of approved variations. The forecast final cost is $700,000, and cost to date sits at $350,000. Billed to date, the total of progress claims raised so far, is $400,000.

Run the formula line by line. Percentage complete is cost to date divided by forecast final cost, $350,000 divided by $700,000, which is 50 per cent. Earned revenue is percentage complete multiplied by the contract value including approved variations, 50 per cent of $800,000, which is $400,000. Over or under-billing is billed to date minus earned revenue, $400,000 minus $400,000, which is zero. On these numbers the job is billed exactly in line with the work, neither ahead nor behind.

Now change one input the way the real world changes it. Two supplier invoices for work already done are still in the drawer, so cost to date is really $385,000 rather than $350,000. Percentage complete becomes $385,000 divided by $700,000, which is 55 per cent. Earned revenue becomes 55 per cent of $800,000, which is $440,000. Over or under-billing becomes $400,000 minus $440,000, which is negative $40,000, an under-billed position. The work was never zero. The job had quietly done $40,000 of work it had not yet claimed, and the only thing hiding it was two invoices that had not been entered. Nothing about the arithmetic changed. One honest input did.

Percentage complete (cost to date divided by forecast final cost), cost to date (costs recorded against the job so far), forecast final cost (what the finished job is now expected to cost in total), contract value (original contract sum plus approved variations only), earned revenue (percentage complete times contract value, also called revenue to date or earned value), billed to date (the total of progress claims raised), over-billing (billed to date above earned revenue), under-billing (billed to date below earned revenue). Definitions for the wider vocabulary live in the construction glossary.

The input that does the most to make this formula tell the truth is the denominator, so the natural next article is forecast final cost, the number that decides whether percentage complete means anything at all.

• Australian Institute of Quantity Surveyors , professional guidance on cost management and progress measurement, the reference for how completion is assessed against cost.
• Your own job cost ledger and progress claim register, the primary record of the cost to date and billed to date figures every WIP calculation depends on.
• Your accountant, for how earned revenue translates into recognised revenue and how a WIP position is treated in your accounts and reporting.