By Daniel Jahn, CPA — Contractor’s Ledger
Two of the most misunderstood concepts in construction accounting are overbilling and underbilling. Many specialty trade contractors have heard these terms from their surety agent or bonding company but aren’t entirely sure what they mean — or why they matter so much.
This guide breaks down both concepts clearly, explains how they affect your cash flow and financial statements, and walks through what surety underwriters think when they see your overbilling/underbilling position.
What Is Overbilling in Construction?
Overbilling (also called “billing in excess of costs incurred” or “costs and billings in excess of revenues”) occurs when you have billed a client more money than you have earned based on the percentage of work actually completed.
A simple example:
- Project contract value: $500,000
- Estimated total cost: $400,000
- Costs incurred to date: $160,000 (40% of budget spent)
- Percentage of completion: 40%
- Revenue earned based on completion: 40% × $500,000 = $200,000
- Amount billed to date: $260,000
In this example, you’ve billed $260,000 but only earned $200,000 based on work performed. The difference — $60,000 — is overbilling.
What Overbilling Means Financially
Overbilling is a liability, not income. You’ve collected cash for work you haven’t done yet. If the project ended today, you’d owe the client $60,000 worth of work. On a properly prepared balance sheet using percentage-of-completion accounting, the $60,000 appears as “Billings in Excess of Revenues” — a current liability.
Overbilling is common (and sometimes intentional) in construction — front-loading a schedule of values to improve early cash flow is a well-known practice. But large or systematic overbilling raises flags with surety underwriters.
What Surety Underwriters Think About Overbilling
A moderate overbilling position isn’t unusual, and sureties know it. But they’re concerned when:
- Overbilling is a large percentage of total contract value (more than 10–15%)
- Overbilling appears on most or all open contracts — suggesting systemic front-loading
- The contractor is using overbilling to fund operations, meaning they’re spending the advance before doing the work
Excessive overbilling can signal that a contractor is cash-thin and relying on new billings to fund old projects — a warning sign for bonding.
What Is Underbilling in Construction?
Underbilling (also called “costs in excess of billings” or “revenues in excess of billings”) is the opposite: you have earned more based on percentage of completion than you have billed the client.
Using the same example structure:
- Project contract value: $500,000
- Percentage of completion: 60%
- Revenue earned: 60% × $500,000 = $300,000
- Amount billed to date: $240,000
You’ve earned $300,000 but only billed $240,000. The $60,000 difference is underbilling — money you’re owed but haven’t invoiced yet.
What Underbilling Means Financially
Underbilling is technically an asset — it represents work performed that hasn’t been billed. On a properly prepared balance sheet, it appears as “Revenues in Excess of Billings” or “Costs in Excess of Billings” in current assets.
However, underbilling can also be a warning sign:
Billing process problems: If you’re consistently underbilling, you may be leaving money on the table. Pay applications that go out late mean cash comes in late. For trade contractors with thin working capital, slow billing is a cash flow killer.
Change orders not being billed: The most common cause of unexpected underbilling is approved change orders that haven’t been invoiced, or extra work performed that hasn’t been formalized as a change order yet.
Over-optimistic completion estimates: If you’re claiming 70% complete but only 60% of the budget has been spent, your WIP schedule shows underbilling — but it may actually reflect optimistic completion estimates rather than uncollected revenue.
Why Your Surety Cares About Both Positions
When a surety underwriter reviews your WIP schedule, they’re looking at your overbilling and underbilling positions across all open contracts. Here’s the math they’re doing:
Overbilling = future work obligation. For every dollar you’re overbilled, you need to perform a dollar of work to earn the cash you’ve already collected. Sureties need to know you have the labor and materials to do that.
Underbilling = questionable asset. Underbilling shows as an asset on your balance sheet, but is it real? Sureties look at whether your underbilling is collectible, properly documented, and based on realistic completion estimates.
Net position = an indicator of overall financial health. Consistently overbilled contractors often have better cash flow but higher risk. Consistently underbilled contractors may have stronger balance sheets on paper but cash flow problems in practice.
The Impact on Your Financial Statements
Under cash-basis accounting, overbilling and underbilling don’t appear on your financial statements at all. Revenue is recognized when invoiced. Costs are recognized when paid. This makes cash-basis financials deeply misleading for contractors doing long-duration projects.
Under percentage-of-completion accounting (the GAAP standard for construction), overbilling and underbilling appear on the balance sheet as current liabilities and current assets respectively. This gives a much more accurate picture of your financial position — and it’s what surety underwriters and most banks require.
This is one of the primary reasons we encourage specialty trade contractors to use percentage-of-completion accounting. Cash-basis statements hide the over/underbilled reality that determines your true financial position.
How to Monitor Your Overbilling and Underbilling
The right tool is a WIP schedule — a report that calculates the overbilled or underbilled position on every open contract and rolls up the total for the company.
Maintaining a current WIP schedule means you know your over/underbilled position at all times. You can identify individual jobs where the billing position is a problem and take corrective action before the job closes.
For contractors who want to increase their bond line, demonstrating that you’re monitoring and managing your overbilling/underbilling position is a meaningful signal to surety underwriters.
Daniel Jahn is a licensed CPA and founder of Contractor’s Ledger, a construction accounting firm serving specialty trade contractors nationwide.
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