WIP and Unbilled Fees in Architecture Practices

What WIP means for an architecture practice

Work in progress, or WIP, is the value of work a practice has carried out on its projects that has not yet been invoiced. It is fee the practice has effectively earned but not yet asked for.

Architecture practices build up WIP because the work runs ahead of the invoicing schedule. A team can spend three months on Stage 3 before the appointment allows the stage to be invoiced, and all of that time sits in WIP until it is billed. Time-charge work that has been done but not yet put on an invoice is WIP too.

Some WIP is normal and healthy. It becomes a problem when it grows month after month, because it means salaries are being paid for work the practice has not yet billed, and every month of delay adds to the cash the practice is funding itself.

WIP is a measure of how far behind the work your invoicing is. Watching it monthly tells you where cash is stuck before the bank balance does.

Two ways to value WIP

WIP can be valued at the cost of the time spent or at the fee earned by the work done. Practices use both, for different purposes, and it helps to know which one a report is showing.

WIP at cost

Multiply unbilled hours by each person's cost rate, which is salary and employment costs per productive hour, sometimes with a share of overhead added. This is the more cautious view. It answers the question of how much the practice has spent on work it has not yet billed.

WIP at fee value

For a fixed fee stage, take the stage fee, multiply it by the percentage complete and subtract what has been invoiced for that stage. For time-charge work, it is unbilled hours at the agreed charge-out rates. This is the figure the practice manager uses to decide what to invoice.

For the accounts

How WIP or unbilled income appears in the year-end accounts depends on the practice's contracts and the accounting standard it reports under, and it can affect the profit reported for the year. That is a decision for the practice's accountant. This guide explains the management view, which is what a practice needs to run cash and projects month to month.

Why WIP matters for cash and year end

WIP is where cash gets stuck. A practice can be profitable on paper and short of cash in the bank because too much of its earned fee is sitting unbilled.

Cash flow

Every pound of WIP is a pound of salary already paid and not yet invoiced. Invoicing it sooner brings the payment date forward.

Fee risk

WIP that has sat for months is harder to bill. Clients query old work and memories fade.

Overrun warning

If the cost of time on a stage is close to, or above, the fee it has earned, the stage is heading over budget.

Year-end accounts

Your accountant will usually ask for a WIP or unbilled income figure at the year end. A monthly figure makes that a quick check.

Forecasting

Unbilled WIP is the first line of the cash flow forecast: money the practice can invoice soon.

A worked example

This illustrative example values WIP on one stage both ways and shows what the numbers say. All figures are invented.

In this example the practice can invoice £6,000 now. The unbilled work cost £5,400, so the margin on it is £600, or 10% of the £6,000. That is thin. It suggests either the stage is using more hours than its fee allows, or the progress estimate is cautious. The project lead should check hours used against the stage budget before the next invoice run.

Review WIP monthly and turn it into invoices

A short monthly WIP review, held just before the invoice run, is the single habit that does most to keep cash moving.

1. Sort by age.Old WIP is the most at risk. Start with anything over 60 days.
2. Ask why it is not billed.Common answers are a stage not signed off, a disputed change or an invoice nobody raised.
3. Change the schedule if needed.If a stage only bills on completion and keeps building WIP, ask the client to move to monthly instalments.
4. Separate unpriced extra work.WIP on work outside the appointment needs a fee agreed. See additional services and variations.
5. Write off deliberately.If WIP will never be billed, recognise it, record why and use the lesson in the next fee proposal.

Questions practices ask

Short answers to the WIP questions practice managers and directors ask most.

What is WIP in an architecture practice?

Work in progress is the value of work done on projects that has not yet been invoiced. It builds up when the work runs ahead of the invoicing schedule, for example during a long stage that is only billed on completion.

How do you calculate unbilled WIP for a fixed fee stage?

Multiply the stage fee by the percentage complete to get fee earned, then subtract what has already been invoiced for the stage. A £30,000 stage at 50% complete with £9,000 invoiced has £6,000 of unbilled WIP at fee value.

Should WIP be valued at cost or at fee?

For running the practice, most managers look at both: fee value shows what can be invoiced, and cost shows what has been spent. How WIP is treated in the statutory accounts depends on the practice's contracts and accounting standard, so agree that with your accountant.

How much WIP is too much?

There is no single benchmark. The warning signs are WIP that keeps growing month on month, WIP older than 60 to 90 days, and WIP on stages that are already over budget. Review it monthly and ask why each item is not yet billed.

How do we reduce WIP?

Invoice monthly by instalment or percentage complete rather than only at stage completion, agree additional fees before doing extra work and hold a WIP review before every invoice run. See stage-based invoicing.

Where Avoice fits

Avoice calculates unbilled WIP from the timesheets and invoices already in the system, so the monthly review starts with the numbers rather than a spreadsheet.

Avoice Financials and Cash Flow shows fees invoiced, WIP unbilled, margin and project profitability, with a cash flow forecast built from what is left to bill. A data-status strip shows which months are Verified, Provisional or Open against Xero, so the practice knows which figures are final. Timesheets roll up against each fee stage, and invoices can be raised in one click from approved time and synced to Xero or QuickBooks. To see what WIP means for margin, read architecture project profitability.

To see WIP for your own live projects, book a demo.