Over/Under Billings in Construction

What Are Over/Under Billings?

Over-billings and under-billings measure the difference between how much revenue you've earned on a project (based on percentage of completion) and how much you've actually billed.

• Over-billed: You've invoiced more than the work you've completed. This is a liability—you owe work to the project owner.
• Under-billed: You've completed more work than you've invoiced. This is an asset—the project owner owes you money.

Neither is inherently bad, but understanding the balance across all your projects is critical for managing cash flow and presenting accurate financial statements.

How to Calculate

The formula is straightforward:

The percentage complete is typically calculated using the cost method: Costs to Date ÷ Estimated Total Costs.

Impact on Financial Statements

Over/under billings directly affect your balance sheet:

• Under-billings appear as a current asset ("Costs and estimated earnings in excess of billings").
• Over-billings appear as a current liability ("Billings in excess of costs and estimated earnings").

These line items are unique to construction accounting and are one of the first things a bonding company, bank, or CPA will look at on your financial statements.

Warning Signs

• Consistently over-billed across all projects: You may be front-loading billings to cover cash flow gaps—a sign of financial stress.
• Large under-billings: You're doing work without billing for it—cash flow will suffer and you may be masking losses.
• Sudden swings: Big changes in over/under billings between periods often indicate cost estimate revisions or billing errors.
• Over-billing on losing jobs: If a project is over-billed AND over budget, you've borrowed from a job that won't generate enough revenue to pay it back.

Management Strategies

1. Update cost estimates monthly: Stale estimates make over/under calculations meaningless.
2. Bill promptly: Submit pay applications as soon as work is completed to minimize under-billings.
3. Review WIP reports monthly: WIP is the source document for over/under billing analysis.
4. Front-load your schedule of values carefully: Strategic front-loading can help cash flow, but excessive over-billing raises red flags with bonding companies.
5. Separate billing from cost tracking: Your billing schedule and cost categories don't have to match exactly, but they need to be reconcilable.

Bonding Implications

Surety companies analyze over/under billings closely. Consistent over-billing suggests a contractor may be using project cash flow to fund operations—a sign of potential financial instability. Under-billing, while less alarming, can indicate inefficient billing practices or cash flow mismanagement.

A balanced portfolio—some projects slightly over-billed, some under-billed—is what sureties consider healthy. The net over/under billing across all projects should be relatively stable period to period.

Scaffold monitors over/under billings across your entire project portfolio as part of our monthly bookkeeping service. We generate WIP schedules, flag billing imbalances early, and prepare the reports your bonding company and bank need—so your financial statements always tell an accurate story.