How to track Effective WIP to manage cashflow and why not to use %Complete
Easy ways to calculate Effective WIP using earned value
Work In Progress (WIP) is an important measure to include in your monthly reporting. Positive WIP is work that has been done but not invoiced. Negative WIP is work that has been invoiced and not done.
However, some work may be ineffective due to rework, mistakes, getting up to speed and helping others and should not be included as WIP. If a Project, Stage or Variation is Fixed Fee you might also have under-estimated the hours needed. Only effective work, often called ‘earned value’ should be considered when calculating true WIP.
To calculate WIP you need to know the % Complete. However, I recommend you don’t use this directly since it is often a poor estimate, especially towards the end of a Stage due to Pareto’s famous 80/20 rule. Instead ask your staff to review their allocated remaining hours and ask themselves “can I get the work done in that time?”.
To calculate effective WIP you need a) Labour Fee$, b) Hours Done, c) Remaining Hours and d) Invoiced to Date.
The more granularity the better but project stages, ideally by role or staff, are typically adequate. Your timesheet system can provide the Hours Done and ideally also allow staff to review and update their Remaining Hours daily.
Labour Fee$ is the Fixed Fee$ minus any Disbursements included in the Fee.
From these, for Fixed Fee work…
% Complete = Hours done / (Hours done + Remaining Hours)
Effective WIP$ = Labour Fee$ * %Complete – Invoiced$
For Time Based work…
Effective WIP$ = (Hours Done – Ineffective Hours)*Rates$ – Invoiced$
Ideally flag ineffective hours when the time is recorded by staff or approved by managers or alternatively before invoicing.
The Ineffective WIP is thus:
Hours Done*Rates$ – Effective WIP$ (Fixed Fee or Time Based) – Invoiced$
Here are some examples:
|Labour Fee||Hours Done||Hourly Rate||Remaining Hours||% Complete||Invoiced||Effective WIP||Ineffective WIP|
If you use remaining hours (rather than % Complete) and keep track of your effective WIP in this way, your monthly profit calculation will be more accurate.