Valuing Work in Progress
Valuing work in progress (WIP) can be a complicated and time consuming exercise. It is essential that you have a methodology to value up your different types of WIP. This will ensure that you have accurate management information; that you know what WIP is in progress, and can therefore plan for its completion, billing and recovery; and so that if H M Revenue & Customs open a tax enquiry you can provide detailed calculations and supporting documents, thus avoiding any potential tax underpayments and the costly interest and penalty regime.
Below is a summary of some helpful tips:
For CFA jobs where the result of the case is not known at year end, include WIP at nil value since there is no certainty that a fee will be chargeable to your client.
For CFA jobs where the result of the case is known to be successful at year end, include WIP at the likely estimated value of the fee to be received, less any estimated costs up to completion including time costs to finish the matter. Even though you are including an estimated fee that will be billable after year end, because you are accounting for expenses up to completion, you should only be accounting for the work actually done as at year end at reasonable recovery rates.
Where contingent work has been undertaken and an “abortive fee” agreed then where the result of the case is not known at year end, the minimum fee to be generated will be this abortive fee. Therefore value up WIP at the amount of this abortive fee.
For cases where the result is known at year end, follow the methodology (in contingent work) as above.
Where a fixed fee has been agreed on a case, then this is the maximum that can be billed. At year end, look at the percentage completion stage of each of these jobs and apply that percentage to the fixed fee to calculate WIP. It will be irrelevant how many hours are charged to that matter on the costing system, but will likely indicate where the matter is up to in the process of completion.
Where cases are billed on a time served basis, then at year end WIP should be calculated firstly by valuing up the time charged to each client at normal chargeout rates. Any interim fee notes should be deducted from this, unless the hours charged were written off the costing system at the point of billing.
Then an inspection should be made of the age of the hours recorded. In some cases it may be more difficult to bill for time as it gets older, since the client may not recall the work being done, or may dispute a full value billing. If this is true then this “old WIP” should be reduced to its estimated billing value.
Finally a review should be made of historic billing recovery rates. Some fee earners may historically generate higher recovery rates than others. It is prudent, therefore, to make provisions against matters being worked on by those individuals with the history of lower recovery rates. Again the aim is to calculate WIP at likely billable and recoverable value, so if all time costs cannot be recovered within a fee, they should not be included in WIP.
For further information please do not hesitate to contact 01772 821021.