What Sureties Actually Look For in Your WIP Report (And Why Most Contractors Get It Wrong)
- Cost Construction Accounting
- Nov 10
- 9 min read
You just wrapped up a profitable quarter. Your jobs are on schedule. Your clients are happy. Then your surety agent calls with news that makes your stomach drop: "We're reducing your bonding capacity by 40%." You pull up your WIP report, scanning the numbers. Revenue looks solid. Costs are under control. Profit margins are healthy. So what's the problem?
Here's what most contractors don't realize: your surety isn't just reading your WIP report, they're interrogating it. And they're looking for answers to questions you didn't even know they were asking.
The Biggest Misconception About WIP Reports
Most contractors treat their WIP (Work in Progress) report like a report card, something you hand to your surety or bank to prove you're doing well. Good revenue? Check. Positive net income? Check. Jobs completed on time? Check.
But sureties don't use your WIP report to see if you're doing well. They use it to predict if you're about to fail.
Think about it from their perspective. When a surety bonds your company for a $5 million project, they're essentially co-signing a loan they hope they'll never have to pay back. If your company defaults, they're on the hook. So when they review your WIP report, they're not celebrating your wins, they're hunting for red flags that suggest you might not finish what you started.
This shift in perspective changes everything about how you should prepare and present your WIP report.
What Your WIP Report Really Tells Sureties (Beyond the Bottom Line)
Your WIP report is essentially your company's financial X-ray. While you see profit and loss, sureties see something much deeper: your operational DNA. Here's what they're actually analyzing:
1. Cash Flow Predictability (Not Just Cash Balance)
Most contractors focus on their bank balance. Sureties focus on your billing rhythm.
What they're looking for:
Are you billing consistently throughout each project, or do you front-load/back-load?
Is your accounts receivable aging increasing month over month?
Are you collecting what you bill, or are receivables piling up?
Why contractors get this wrong: You might show $500K in unbilled revenue and think "Great! That's money in the pipeline." Your surety sees the same number and thinks "Why haven't they billed this work? Are owners disputing quality? Is the contractor afraid to bill because they're behind schedule?"
The red flag: Unbilled receivables that grow faster than 15% of contract value, or aged receivables beyond 60 days. Both signal potential disputes, poor project management, or cash flow problems brewing beneath the surface.
2. Gross Profit Fade (The Most Dangerous Trend)
Here's a scenario that happens all the time: A contractor bids a job at 25% gross profit. Six months in, the WIP report shows 23% gross profit. Three months later, it's 20%. At substantial completion, it's 15%.
What sureties see: This isn't just "lower margins" it's evidence of poor cost control, inaccurate estimating, or scope creep that's not being managed. More importantly, it's a pattern that suggests your next projects will follow the same trajectory.
Why contractors miss this: They see the fade as "just how construction works unexpected costs happen." Sureties see it as systemic failure in project management and estimating.
The threshold: Any project showing more than 3-5 percentage points of gross profit fade from estimate to actual raises immediate concerns. Multiple projects showing this pattern? That's when bonding capacity gets cut.
3. The Overbilling/Underbilling Pattern
This is where most contractors completely misunderstand what sureties are looking for.
Common contractor thinking:
"Overbilling is good, it means we have positive cash flow!"
"A little underbilling is fine, we'll catch up next month."
What sureties actually think:
Consistent overbilling suggests you're billing for work not yet completed. If something goes wrong (change orders disputed, quality issues, delays), you'll have to return that cash—cash you've likely already spent on other projects or overhead. This is a classic sign of a company robbing Peter to pay Paul.
Growing underbilling means you're completing work but not getting paid for it. Either you're afraid to bill (bad), your customer is disputing your work (worse), or you're so disorganized you don't even know what you've completed (worst).
The pattern sureties trust: Slight underbilling early in a project (shows conservative billing practices), transitioning to breakeven or slight overbilling in the middle (shows good cash flow management), and finishing at or near breakeven (shows accurate project completion and final billing).
The Three WIP Metrics That Make or Break Your Bonding Capacity
While sureties review dozens of data points, three metrics carry the most weight in their underwriting decisions:
Metric 1: Backlog-to-Equity Ratio
The calculation: Total backlog ÷ Working capital |
What sureties want to see: 10:1 or lower for most contractors (varies by trade and project types)
Why it matters: This tells sureties whether you have enough financial cushion to handle surprises across all your active projects. A ratio above 12:1 signals you're overextended taking on more work than your balance sheet can safely support.
Where contractors go wrong: They chase growth without building working capital proportionally. You land a $3M project (great!), but your working capital is only $200K. That's a 15:1 ratio, an automatic red flag.
Metric 2: Contract-to-Complete Analysis Accuracy
What this measures: How accurate are your estimated costs to complete each project?
What sureties do: They compare your current-month cost-to-complete estimates against your prior-month estimates. If you're consistently adjusting costs upward month after month, that's evidence you don't actually know what your jobs will cost.
The test: Pull your last three months of WIP reports. For each active project, compare the "estimated cost to complete" from month to month. If you see repeated upward adjustments of 5% or more, your surety sees it too.
Why contractors miss this: They treat cost-to-complete as a "best guess" that they'll update as they go. Sureties treat it as a test of your estimating and project management competence.
Metric 3: Earnings Recognition Method Consistency
Most contractors use percentage-of-completion accounting for their WIP reports. But here's what sureties scrutinize: how you're calculating that percentage.
Red flag 1: Switching methods project to project (some calculated by costs incurred, others by units completed, others by milestones).
Red flag 2: Recognizing revenue faster than costs on the same project (example: showing 60% revenue recognition but only 50% cost incurred unless you can prove why, this looks like manipulation).
Red flag 3: Projects that stay at the same percentage complete for multiple months, then suddenly jump (example: showing 45%, 45%, 47%, 78% over four months).
What this tells sureties: Inconsistency or suspicious patterns suggest you're either incompetent at tracking job progress or you're manipulating the numbers to make things look better than they are. Either way, they can't trust your reporting.
The Most Common WIP Report Mistakes (And How to Fix Them)
Mistake 1: Treating Your WIP Report as a Monthly Chore
What contractors do: They compile their WIP report at month-end, often rushing to meet their CPA's deadline, focusing only on getting the numbers in.
What you should do instead: Treat your WIP report as a real-time management tool. Review job-level profitability weekly. Update cost-to-complete estimates bi-weekly based on actual field conditions. Use your WIP data to make decisions about labor allocation, material purchasing, and change order pricing.
The payoff: When your surety reviews your WIP, they'll see a company that uses financial data to manage operations not just report them. That's the difference between a contractor who gets capacity increases and one who gets restrictions.
Mistake 2: Hiding Problems Instead of Explaining Them
Construction is unpredictable. Weather delays happen. Supply chain disruptions occur. Change orders get disputed. Sureties know this.
What contractors do wrong: They try to smooth over problems in their WIP report or avoid highlighting issues, thinking "I don't want to worry my surety."
What you should do: Proactively identify and explain variances in a narrative accompanying your WIP report. If a project's gross profit dropped from 22% to 18%, explain exactly why: "Job 2024-15 experienced gross profit fade due to three weeks of rain delay in March, resulting in $47K in unrecovered labor costs. We have since implemented a weather contingency plan for similar projects and adjusted our estimating to include 5% weather contingency for Q2-Q3 projects."
Why this works: Sureties don't expect perfection. They expect competence. A contractor who can identify problems, explain root causes, and articulate corrective actions is a contractor they can trust with bigger bonds.
Mistake 3: Not Matching Your WIP Report to Your Internal Job Costing
Here's a scenario that kills bonding capacity fast: Your WIP report shows Job 2024-08 at 20% gross profit. But internally, your project manager knows it's really tracking at 12% because of cost overruns you haven't booked yet.
Why contractors do this: They don't want to report a problem until they're "sure" or until they've tried to recover costs through change orders.
What happens: Three months later, those costs hit the books. Your WIP report suddenly shows a massive gross profit fade, and your surety sees a contractor who either doesn't know what's happening on their jobs or deliberately hides problems.
The fix: Your WIP report and your internal job costing must match. If your PM knows about a cost overrun, it needs to be in your cost-to-complete estimate immediately. This doesn't mean you can't try to recover it through change orders, it means you report reality and then track recovery separately.
What a "Surety-Ready" WIP Report Actually Looks Like
Let me paint you a picture of a WIP report that makes underwriters confident in increasing your bonding capacity:
The format: Clean, consistent, and complete. Every project shows contract amount, costs to date, estimated cost to complete, billings to date, over/under billing status, and gross profit percentage. No missing data. No "TBD" in the estimated cost to complete column.
The narrative: A one-page summary that proactively addresses:
Any projects with gross profit variance greater than 2% from estimate (with explanations)
Any projects with over/underbilling greater than 10% (with explanations)
Any aged receivables beyond 60 days (with collection status and plan)
A forward-looking statement on backlog and capacity
The backup: Supporting schedules that reconcile your WIP report to your financial statements. Accounts receivable aging report. Accounts payable aging report. A current equipment list if you're an equipment-intensive contractor.
The consistency: Month over month, your calculation methods don't change. Your presentation format doesn't change. Your level of detail doesn't change. Sureties can quickly spot trends because you're not making them relearn how to read your reports every month.
When Your WIP Report Becomes Your Competitive Advantage
Here's the reality most contractors don't see: your competitors are terrible at WIP reporting. They submit the bare minimum. They hide problems. They're inconsistent. They treat it as a compliance exercise rather than a strategic tool.
This creates an enormous opportunity for contractors who get it right.
When your surety sees a contractor who:
Proactively identifies and explains variances
Maintains consistent, accurate reporting
Uses WIP data to actually manage jobs (not just report on them)
Has narratives that demonstrate operational competence
That's a contractor they want to support with increased bonding capacity, better terms, and faster turnarounds.
Your WIP report isn't just a financial statement. It's a demonstration of your company's operational maturity. It's proof that you can handle bigger, more complex projects. It's the document that unlocks your company's growth potential.
Your Next Steps: Getting Your WIP Report Surety-Ready
If you're reading this and realizing your WIP reports have been missing the mark, here's what to do:
Step 1: Audit your last three months of WIP reports. Look for the red flags discussed in this article: gross profit fade, inconsistent billing patterns, unexplained variances, missing cost-to-complete estimates.
Step 2: Implement real-time job costing. Your WIP report is only as good as your underlying job cost data. If you're not tracking costs weekly at a minimum, you're flying blind.
Step 3: Create a WIP narrative template. Don't just submit numbers. Include a one-page narrative that tells the story behind the numbers. Make it easy for your surety to understand your business.
Step 4: Get professional help if you need it. If your current accounting team doesn't specialize in construction, they might not understand what sureties need to see. Construction specific accounting isn't just about knowing debits and credits. It's about understanding percentage of completion accounting, over/underbilling mechanics, and surety expectations.
Your WIP report is the single most important document your surety reviews. It determines your bonding capacity, which determines which projects you can bid, which determines how fast your company can grow.
Get it right, and you unlock opportunities your competitors can't access. Get it wrong, and you'll spend years wondering why you can't break through to the next level even when your projects are profitable.
At Construction Cost Accounting, we specialize in helping contractors build financial systems that don't just satisfy sureties and banks, they drive better business decisions. Our construction-specific accounting services ensure your WIP reports tell the story of a well-managed, growth-ready contractor.
Want to see how your WIP report measures up? Contact us for a complimentary WIP report review and learn what your surety is really seeing in your numbers.
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