Business Central Projects: Understanding WIP Methods

Project WIP in Business Central

One of the primary benefits of using the Business Central Projects module to manage your organizations projects is that it is fully integrated with the other modules within Business Central – including purchasing, inventory and warehouse management, sales and accounts receivable, and – perhaps most importantly – the General Ledger (G/L) and financial reporting.

Understanding how Project data integrates with the General Ledger within Business Central is one of the most challenging aspects of implementing the Projects module. While the actual setup seems straight-forward, setting it up in a way that can produce financial reports that are easily understood by the management team and are fully reconcilable from a data audit and integrity perspective can be challenging.  There are a couple reasons for this, one of which is the fact that the G/L Entries must be generated so that the entire system can be fully reconcilable for the current period as well as prior periods. This ability to continue to be able to reconcile prior periods is extremely powerful, but it also means that the system generates many G/L Entries each period. The good news is that once setup properly, the use of Project WIP Method Codes allows the finance team to quickly produce financial statements where: (1) Project revenue matches the project cost per period per GAAP or equivalent accounting principles, (2) Project WIP Costs are fully reconcilable at the end of each accounting period, and (3) Unearned Revenue (or Deferred Revenue) is fully reconcilable at the end of each accounting period.

In order to ensure that the system is setup properly, there must be a complete understanding of how and when the G/L Entries are generated from Projects.

The first key concept is that the Projects module was designed to be fully integrated with all of the other Business Central modules, including the leveraging of the existing G/L integration features of these modules to post transactions to the General Ledger in real-time.  For example, when a Sales Invoice is generated from a Project, the system will use the General Posting Setup and the Customer Posting Group tables to generate a G/L Entry that debits “Accounts Receivable” and credits “Sales”.

The second key concept is that the Projects module was designed so that WIP Method Codes do not need to be used if these features are not required. For example, as customer invoices are posted, “Sales” gets updated in the General Ledger.  Likewise, when inventory items are consumed to a Project, costs are effectively recognized.  This scenario (where no sales or cost needs to be accrued or deferred to a future period) may be suitable for your organization - perhaps because all of your projects are very short duration or because revenue and costs are typically posted at the same time.  In these cases, there is no need to worry about understanding how Project Posting Groups and WIP Method Codes work. 

However, if your projects cross over multiple accounting periods, and revenues and costs are often not transacted within the same accounting period, then WIP Method Codes are required. Without them, the periodic income statement will be “lumpy” and unreliable and with wild swings in profitability from one period to the next period. The end result would be a lack of visibility by management to the organization's true profitability per period and a reduced opportunity to properly manage the organization.

Again, the good news is that Business Central provides all the tools to ensure that Project-related sales and costs are properly reflected on the financial statements.  The features used to manage sales and cost recognition include Project Posting Groups, WIP Method Codes, and the Calculate Project WIP process.  These features are designed specifically to ensure that Project-related sales and costs are properly recognized per period.  While the use of WIP Method Codes and the Calculate Project WIP feature is where the complexity emerges, it is also this powerful toolset that enables your finance and accounting team to very quickly produce reliable and fully reconcilable financial statements for your organization. 

Some of the key questions that need to be answered include:  What is a WIP Method Code?  What are Project Posting Groups? How does the “Calculate WIP” feature work?  

Project WIP calculation tools

WIP Method Code:  The WIP Method Code is the key to determine how the system calculates the sales and cost to be posted for each period. It is possible to use multiple WIP Method Codes for different types of Projects, or even for some Projects to not have a WIP Method Code assigned (in which case no values will be calculated for those Projects).  There are several standard WIP Methods defined within Business Central that meet the needs of most organizations including “Completed Contract”, “Percentage Completion”, “Sales Value”, “Cost Value”.  For a detailed explanation of each method and the formulas used within each calculation, visit the Microsoft Learn page on Understanding WIP Methods in Project Management.

Calculate WIP:  Project Calculate WIP is a process that is typically run by the finance and accounting team at the end of the period.  For each Project, this process reviews the existing sales and cost entries that have been posted as well as the amount of sales and costs that have been previously recognized and re-distributes the entries based on the WIP Method Code assigned to each Project, resulting in the proper amount of sales and cost being recognized in the current period.

Note: For several WIP Methods, having accurate Project cost and sales estimates (“Budget” type Project Planning Lines) is key to calculating the correct values each month, so setting up and maintaining accurate Project budgets is extremely important.

Project Posting Group: Once the amounts of sales and cost to recognize have been calculated by the Project Calculate WIP process, it is the Project Posting Group assigned to the Project that determines the specific G/L Accounts used when the Project WIP entries are posted.  These entries can be reviewed and confirmed before they are posted to the General Ledger via a process called Post WIP to G/L.  

Note: each WIP Method uses the Project Posting Groups slightly differently, so it is important to fully test each WIP scenario to ensure that the correct entries are being created within the General Ledger.

Beyond these basics, there are several additional features and setup options available that can significantly change how the Project WIP entries are generated and also impact the ability to reconcile specific G/L Accounts.  Therefore, the full answer to each of these questions posed above can be much more complex than the simple explanations provided above.  So how to proceed?

The best approach is conducting a Project Recognition workshop.  This 2-3 day workshop should be completed after the key user team has been trained on the fundamentals of settings up Projects and processing Project-related sales and cost entries.  The key focus of this workshop is how and when G/L Entries are created throughout the Project lifecycle. Therefore, the finance and accounting team should be the primary participants in the workshop.  The goal of the workshop should be to fully work through all real-world Project scenarios to confirm that the financial reports generated are accurate, easily-understood, and fully reconcilable. By the end of the workshop, the team should understand all of the following:

1)    How Project-related G/L Entries are generated within Business Central.

2)    The specific calculations used by each of the available WIP Methods.

3)    If the Project “Calculate WIP” process is required, and if so, for which types of projects. 

4)    Which WIP Method Code(s) will be used. Additionally, if WIP calculations are required for both Sales and Cost recognition, or only for Cost, or only for Sales.

5)    How to complete the period-end WIP calculation process.

6)    How to present the financial results associated with Projects.

7)    How to reconcile the detailed Project WIP data to the General Ledger.

When implemented correctly, the use of Project WIP Methods can significantly reduce the amount of time spent by the finance and accounting team on producing the Project Sales and WIP values.  Instead of spending days compiling data in non-integrated spreadsheets and reports, WIP Method Codes can reduce your periodic Project reconciliation process from multiple days to less than an hour. Besides the obvious time savings, deploying a fully-integrated solution where the Project recognition entries are being calculated consistently from period to period will also result in increased confidence in the financial statements being presented, and that is the true magic delivered when using Project WIP in Business Central!

The Project WIP calculation results per Project