Every month a project manager revises the estimated cost at completion on each open job, and the controller carries the new figure onto the work-in-progress schedule. When the revised estimate rises and the contract does not, the job’s expected gross profit shrinks. That shrinkage is profit fade. CLA, the accounting firm, defines it as a gradual reduction in the gross profit on a project.
On a single job, fade shows up as one number that changed since last month. Measuring it across twenty or fifty jobs takes a few decisions about baselines and weighting, and those decisions change the answer. The columns it draws from are covered in the work-in-progress schedule walkthrough posted September 26.
Who reads the fade number
Old Republic Surety writes that the WIP lets an underwriter track profitability over time and spot fades and gains. It also asks that each WIP include jobs completed since the last one, so the surety can compare the original estimated gross profit with the final margin on each contract. CLA says fade analysis shows underwriters and loan officers that the company is watching job profitability.
How fade is measured
Fade needs two numbers per job, both from records you already keep.
- Bid gross profit: the contract amount minus the estimated cost in the original estimate.
- Current estimated gross profit: the contract amount minus the current estimate at completion, from this month’s WIP.
Fade in dollars is the first minus the second. Fade in percentage points is the bid margin minus the current margin, where margin is gross profit divided by contract. A negative result is a gain.
Month-over-month fade uses last month’s estimated gross profit as the baseline in place of the bid. Track both. The bid comparison measures drift over the life of the job, while the monthly one picks out the jobs whose estimates changed at this close.
A worked example
The table below is an example with round numbers. It shows five open jobs at one month end, with no change orders.
| Job | Estimator | Contract | Bid gross profit | Bid margin | Current est. gross profit | Current margin | Fade (points) | Fade ($) | % complete |
|---|---|---|---|---|---|---|---|---|---|
| Job A | Estimator 1 | $2,000,000 | $200,000 | 10.0% | $200,000 | 10.0% | 0.0 | $0 | 50% |
| Job B | Estimator 2 | $1,000,000 | $120,000 | 12.0% | $60,000 | 6.0% | 6.0 | $60,000 | 60% |
| Job C | Estimator 1 | $3,000,000 | $300,000 | 10.0% | $330,000 | 11.0% | -1.0 | -$30,000 | 40% |
| Job D | Estimator 2 | $500,000 | $50,000 | 10.0% | -$25,000 | -5.0% | 15.0 | $75,000 | 70% |
| Job E | Estimator 2 | $1,500,000 | $180,000 | 12.0% | $150,000 | 10.0% | 2.0 | $30,000 | 20% |
| Total | $8,000,000 | $850,000 | 10.6% | $715,000 | 8.9% | 1.7 | $135,000 |
Across the portfolio, bid gross profit was $850,000 on $8,000,000 of contracts, a 10.6% margin. The current estimate is $715,000, or 8.9%. Portfolio fade is 1.7 points, or $135,000.
Job D has turned into a loss. It was bid at a 10% margin and now carries an estimated $25,000 loss, a fade of 15 points on the smallest contract in the group.
Weighting and netting
Weight the portfolio figure by contract value, as the total row does. A simple average of the five job fades is 4.4 points, because Job D counts as much as Job C at six times the size. When the simple average runs well above the weighted figure, most of the fade sits on a few smaller jobs.
Report gross fade next to net fade. Jobs B, D and E faded a combined $165,000, and Job C gained $30,000. The $135,000 net figure hides how much margin the three fading jobs lost.
How fade reaches the income statement
Under the cost-to-cost method, gross profit to date is percent complete times estimated gross profit. When the estimate drops, the profit already recognized on earlier work comes back out in the month of the change.
Take Job B. Suppose last month it was 50% complete with $120,000 of estimated gross profit, so $60,000 had been recognized. This month it is 60% complete at $60,000 of estimated gross profit, so profit to date is $36,000. The job books a $24,000 gross loss this month while it is still expected to make money.
Loss jobs work differently. PwC’s revenue guide explains that when the current estimate of total costs at completion exceeds the expected consideration on a construction-type contract, the entire expected loss should be recorded in the period it becomes evident. If Job D had shown its $50,000 bid margin at 60% complete last month, $30,000 was recognized. This month the full $25,000 loss is recorded, so the month absorbs $55,000 on a $500,000 job.
Cutting fade by estimator and project manager
Group the same rows by estimator or project manager to see whose estimates move after award.
| Estimator | Jobs | Contract | Bid gross profit | Bid margin | Current est. gross profit | Current margin | Fade (points) |
|---|---|---|---|---|---|---|---|
| Estimator 1 | 2 | $5,000,000 | $500,000 | 10.0% | $530,000 | 10.6% | -0.6 |
| Estimator 2 | 3 | $3,000,000 | $350,000 | 11.7% | $185,000 | 6.2% | 5.5 |
In this example, Estimator 2 bid higher margins, at 11.7%, and those jobs now carry 6.2%. Estimator 1’s jobs have gained 0.6 points. Five jobs are too few to judge anyone, so treat a split like this as a question to ask at the WIP meeting.
A sponsored article by Prophix, a finance software vendor, on CFMA’s website suggests viewing the WIP by project manager, customer, type of work and estimator. The same article says aggressive estimates by project managers lead to profit fade, which sureties and banks view unfavorably. CLA recommends including completed jobs in each project manager’s fade analysis and discussing the reliability of fade estimates with project managers.
Change orders and closed jobs
Old Republic Surety notes that a change order changes the contract price, the total cost and the estimated profit together. If you compare current profit against the original bid alone, a profitable change order can cover fade on base scope. Add the markup on each approved change order to the bid baseline, and the fade figure then measures the base scope and the change orders against what each was priced to earn.
Closed jobs give the most reliable fade figure, because the final margin is known. Keep them in the report for at least a year after completion so each estimator’s record includes finished work.
Coding the cause
CLA lists six causes that fade can usually be traced to:
- Incomplete or overly optimistic production or unit cost estimates.
- Underestimated labor or equipment rates.
- Change orders or extra work that cannot be billed.
- Poor supplier or subcontractor performance.
- Inadequate field supervision, resources or training.
- Adverse weather.
Ask the project manager to assign one of these codes whenever a job fades by more than a threshold you set. After a few quarters, total fade dollars by cause code shows which part of the company the fade comes from.
How to track this on your jobs
Store each month’s WIP as a dated snapshot with job number, estimator, project manager, contract, estimated total cost and percent complete. In Excel or Power BI, join each job’s current row to its bid row and to last month’s row by job number, then calculate fade in points and dollars for both baselines.
Start with this month’s WIP and your original estimates for the ten largest open jobs. Record the bid gross profit next to the current estimate for each one, and you have the first fade report.