When it comes to the world of fixed-price projects, WIP is a term that you will become very familiar with, if you haven’t already. WIP (Work-in-Progress) basically represents the amount of work that you have performed but cannot yet invoice for. WIP is the difference between the amount that you have ‘invested’ in completing the work and the amount you have actually invoiced for the work. The reason for accumulating WIP is primarily because you have not yet achieved a milestone for which you can contractually bill for. Typically, fixed-price contracts will contain a series of billing milestones or invoice triggers that have clear markers on them for when you are able to invoice for them (ex. Noting delivery and/or acceptance of specific deliverables).
It’s very important to do some analysis before signing a fixed-price agreement. You need to understand what your billing schedule is going to look like according to the proposed terms of the contract but also (and more importantly) understand what the cost of performing the work is going to be to ensure a healthy cash flow during the execution of the project. For example, if you have a fixed price agreement where you only bill for one large deliverable at the end of the project, you need to ensure that you have the resources (i.e. cash) to support the work of that deliverable until you are able to invoice and get paid for it. Here are three tips on how to effectively manage your WIP on fixed-price projects.
Build Favorable Terms in Your Contract
I know what you’re thinking – “yeah, right – if it were only so easy”. True, having a favorable contract is often a challenge but it’s worth noting that in order for a delivery organization to be successful in fixed-price agreements, it’s important to have payment terms that are workable from both sides. Plot out a spreadsheet that shows your projected costs of delivery for the project on a monthly basis and determine what terms would be acceptable with respect to keeping your WIP in as small a position as possible. Ideally, settling on a minimal monthly payment from the customer plus some potential larger payments for specific project milestones are typically a good model to start from.
Have Clear Invoice Trigger Criteria
Your contract must state clear and unambiguous criteria for when you can send an invoice to your customer. Often times a major deliverable is completed in the eyes of the project team but the customer will have a different perspective on what is ‘complete’ so it’s important to ensure that your contract has crystal clear language on when an invoice can be triggered. That way you have an ironclad agreement on when an invoice can be sent, but also a solid understanding of what exactly is to be delivered so that nothing is overlooked.
Monitor Your Costs
While this one is more Project Management 101, it’s important to monitor the resources being spent on your deliverables (most often it’s labor). Ensuring that your project plan is constructed in a way that you can quickly determine if your project spend is going according to plan or if it’s exceeding what you had forecasted is vital to being able to keep your WIP under control. While you may have great terms in your contract in terms of crystal clear language around what and when your invoices can be billed for, if you have underestimated the cost of delivering or have issues with execution, this can quickly balloon your WIP to a very unfavorable position. Ensure you have the tools and structure in place for your project manager to monitor deliverable-specific costs.