The balance isn't the story. The reason behind it is.

Most contractors are familiar with overbillings and underbillings. They show up on the WIP schedule every month, and it's easy to look at an overbilling as a positive and an underbilling as a problem.

The reality isn't quite that simple.

An overbilling doesn't necessarily mean a job is performing well, and an underbilling doesn't necessarily mean something is wrong. What matters is understanding why the balance exists, how it's changing, and what it could be telling you about the job.

Overbillings & Underbillings: What Are They Really Telling You?

Start With Why

At the most basic level, an overbilling means you've billed more than the revenue you've earned based on the project's percentage of completion. An underbilling means you've earned more revenue than you've billed.

That's the easy part. The more important question is why.

An underbilling could simply result from timing, a pay application that hasn't gone out yet, or a change order waiting for approval. It could also mean billing isn't keeping pace with production or the owner or GC doesn't agree with the amount of work completed.

Those situations can create the same balance, but they tell very different stories about the project.

Being Overbilled Doesn't Mean You're in the Clear

Getting ahead on billing can be great for cash flow, but that doesn't mean the cash is yours to spend however you want.

A job may be substantially overbilled because the schedule of values allowed you to bill ahead of costs or because expensive phases of the project haven't happened yet. You have the cash today, but you still have work to perform tomorrow.

That becomes especially important when cash from an overbilled job is being used elsewhere in the business. If the remaining work eventually requires that cash, you need to know where it's going to come from.

The same applies when projected profitability changes. If an overbilled job begins experiencing profit fade and the estimated cost to complete increases, more of that cash may be needed to finish the job than originally expected.

Overbilling can be a healthy part of managing cash flow. The important thing is understanding how much of that cash is actually available and how much is already spoken for.

Being Underbilled Doesn't Mean You're Doing Something Wrong

Underbillings deserve attention because the contractor may effectively be financing part of the project until that work can be billed and collected. But the existence of an underbilling doesn't automatically indicate a problem.

A temporary underbilling caused by normal billing timing is very different from one that continues growing month after month. An underbilling tied to an approved change order is also very different from one tied to work the customer hasn't agreed to pay for.

If a significant underbilling appears on the WIP schedule, understand what's creating it, what needs to happen before it can be billed, and whether there's any reason to question whether the full amount will ultimately be collected.

Look at the Trend, Not Just the Balance

A snapshot tells you where a project stands today. Looking at the same job month after month tells you where it's going.

If an underbilling continues to grow, why isn't billing catching up? If an overbilling keeps increasing, what remaining costs will eventually consume that cash? If a job moves significantly from one position to another, what changed?

Make sure you trust the numbers creating the balance too. If costs haven't been properly captured or your estimated cost to complete hasn't been updated, the resulting overbilling or underbilling may not tell the story you think it does.

Overbillings and underbillings are outcomes. They're not explanations.

Use them as a reason to talk to the project team, ask better questions, and understand what's happening on the job.

AI Prompt for Contractors

Review my current WIP schedule and identify projects with significant overbillings or underbillings. Compare those balances to prior months and highlight meaningful changes or trends. For each project that stands out, suggest possible explanations related to billing timing, change orders, project progress, estimated costs to complete, or cash flow. Then provide questions management should discuss with the project team to better understand each balance.

Always remove sensitive or identifying financial information before uploading documents to an AI tool.

Looking Ahead

Every month brings another opportunity to better understand your business. We'll continue sharing practical construction accounting insights that help contractors make more informed financial decisions.

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