A construction project can look healthy from one financial measure and concerning from another. The reported margin might be strong. WIP might be increasing. Cash might be deteriorating. None of those numbers necessarily tells you there is a problem. But together, they tell management something important about what is happening inside the project. This is why construction businesses need to understand the relationship between WIP, margin and cash, rather than reviewing each independently. Each provides a different perspective. Margin tells you what you expect to earn. WIP helps explain the timing between work performed and what has been billed or recognised. Cash tells you what has actually converted into money available to the business. The real insight comes from understanding how the three move together.
Start with the project forecast Before looking at WIP or cash, management needs confidence in the underlying project forecast. A project might have a contract value of $10 million, forecast total costs of $9 million and forecast final profit of $1 million. That 10% margin isn't fixed simply because it appeared in the tender or initial budget. It changes as the project develops. The project forecast should continually incorporate the latest available information. If the forecast isn't credible, the reported margin won't be credible either.
Margin tells you about expected profitability Margin is usually one of the first numbers management looks at. That makes sense.
A project won at 10% that is now forecast to finish at 6% deserves attention. But margin alone has limitations. A project could still be reporting a 10% forecast margin while carrying significant unresolved variations. It might have optimistic assumptions about future productivity. It could be relying on commercial recoveries that haven't been agreed. The question shouldn't only be: "What margin is the project reporting?" It should also be: "What assumptions need to be true for us to achieve that margin?"
WIP helps explain where profit is sitting Work in progress is an important part of construction accounting because the timing of work performed, revenue recognition and billing rarely aligns perfectly. At a high level, WIP helps management understand the difference between the economic progress of a project and its billing position. But a WIP balance should never simply be accepted because the accounting produces it. Management needs to understand what sits behind it. If WIP increases materially, why? Has significant work genuinely been performed but not yet billed? Is there a contractual milestone preventing billing? Are claims being prepared slowly? Are variations sitting inside the balance? Is the project forecast relying on revenue that remains commercially uncertain?
Not all WIP has the same quality Imagine two projects each showing $500,000 of WIP. On Project A, the amount relates to work completed late in the month that will be included in the next routine progress claim. On Project B, the $500,000 relates largely to variations that have been discussed for months but remain unapproved by the customer. The accounting number might look similar. The financial risk is not. This is why management should consider not just the quantity of WIP, but its quality and age.
Cash provides another reality check Cash cuts through some of the accounting complexity. Ultimately, has the customer paid? A project can report profit while consuming cash. That may be perfectly reasonable during mobilisation or a period of rapid delivery. But if the project continues consuming cash month after month, management should understand why. Cash doesn't answer every question. But it tells management where to start looking.
The three measures need to reconcile The strongest project reviews connect these measures. Consider a project where: Forecast margin: stable WIP: increasing Cash: deteriorating That doesn't automatically mean the margin is wrong. But it should trigger questions. Now consider: Forecast margin: declining WIP: increasing Cash: deteriorating That combination tells a more concerning story. The individual measures matter. The movement between them matters more.
Variations can distort all three Suppose a contractor performs $300,000 of additional work. The project team believes the work is recoverable. If the expected variation revenue is included in the forecast, project margin may remain intact. If the work hasn't yet been billed, WIP may increase. And because the contractor has already paid labour, materials and subcontractors, cash may decline.
Management now has: margin supported by an assumption WIP supported by an entitlement cash already spent. That doesn't mean the accounting treatment is necessarily wrong. It does mean the commercial position deserves attention.
Margin deterioration should move early One of the most damaging behaviours in project businesses is delaying bad news. Teams may believe future productivity will improve. A claim might still be recovered. A subcontract negotiation could produce savings. Some of those things may happen. But forecasts should represent the most realistic current view of the project, not the outcome everyone hopes to achieve. Bad news identified early becomes a management problem. Bad news identified late often becomes a financial result.
Look at trends rather than individual months Construction results can be noisy. One month's WIP movement or cash position may have a perfectly reasonable explanation. The trend is usually more valuable. Management should look at how project measures develop over time:
- forecast final margin
- margin movement
- WIP balance
- age and composition of WIP
- unapproved variations
- billed debtors
- debtor ageing
- retentions
- project cash position.
Warning signs management should investigate I would look more closely when:
- WIP is growing faster than project revenue
- significant WIP is becoming aged
- unapproved variations represent a material portion of forecast profit
- project margins remain unchanged despite known operational problems
- forecast margin improvements continually sit in future periods
- project cash continues deteriorating without a clear timing explanation
- debtors are increasing while WIP remains high
- margin reductions consistently occur late in projects
- finance, commercial and operations have different views of the project outcome
- project reviews focus on margin without discussing cash conversion.
What should a good project review show? For each material project, I would expect management to be able to see: Original margin Current forecast margin Movement in forecast margin Cost to complete WIP and its composition Unapproved variations and claims Debtors and retentions Cash position or cash exposure Key commercial and operational risks Actions required The purpose isn't to produce another large report. It is to make inconsistencies visible.
The numbers should tell the same story Good project financial management isn't about maximising reported margin or minimising WIP. It is about ensuring the financial information reflects the commercial reality of the project. The objective isn't simply to ask: "Is this project profitable?" It is to understand: "Is the forecast profit real, how much of it remains tied up in the project, and how effectively is it converting into cash?"
Salt Strategic Advisory works with growing construction, infrastructure and project-based businesses to strengthen financial visibility, project forecasting, cash flow and commercial decision-making. If project margins appear healthy but WIP continues to grow and cash conversion is deteriorating, looking at the three measures together can often reveal issues that aren't obvious from the profit and loss statement alone.