Contractor WIP Series: Why Overbillings and Underbillings Belong on the Balance Sheet
Contractors do not need another accounting report they cannot use.
They need to know what they earned, what it cost to earn it, where each project is headed, and whether today’s cash is masking tomorrow’s problem.
That is what a properly prepared work-in-process schedule can reveal.
This five-part series breaks down WIP accounting in practical terms, from revenue recognition and overbillings to cost allocation and the mistakes that distort job margins.
Part Three.
Overbillings and underbillings are sometimes treated as mysterious accounting adjustments. No, we don’t withhold access to a crystal ball.
They are actually straightforward comparisons between two amounts:
Revenue earned to date
Amount billed to the customer to date
Overbillings
An overbilling occurs when cumulative billings exceed cumulative revenue earned.
Overbilling = Billings to Date less Revenue Earned to Date
The contractor has billed ahead of its performance. The difference is generally recorded as a contract liability.
This does not automatically mean something is wrong. Billing ahead can be contractually appropriate and beneficial to cash flow.
But it does mean that part of the cash or receivable relates to work the contractor still owes the customer.
Underbillings
An underbilling occurs when cumulative revenue earned exceeds cumulative billings.
Underbilling = Revenue Earned to Date less Billings to Date
The contractor has performed more work than it has billed. The difference is generally recorded as a contract asset.
Some underbillings are normal, for example, when billing occurs shortly after month-end. Others can signal a problem:
Unapproved or disputed change orders
Missed billing deadlines
Documentation deficiencies
Unsubmitted pay applications
Project management delays
Costs incurred outside the approved scope
Revenue recorded using an incomplete or overly optimistic estimate
Why the WIP must reconcile to the balance sheet
The WIP schedule is not a separate management spreadsheet that can float independently from the accounting records.
Its totals must reconcile to the related contract asset and contract liability balances in the general ledger.
If the WIP shows $425,000 of underbillings but the balance sheet reports $290,000, management does not have one version of the truth. It has two.
A disciplined close process should reconcile:
Contract assets
Contract liabilities
Accounts receivable
Retainage receivable
Revenue
Construction costs
Billings or progress-billing accounts
Unreconciled differences may result from outdated journal entries, incorrect job mapping, omitted projects, inconsistent cutoffs, retainage classification, or manual spreadsheet errors.
What Owners Should Watch
Large overbillings can create a false sense of liquidity. The cash may already be committed to completing the related work.
Large underbillings can place pressure on working capital and may not be collectible if the underlying amount has not been properly documented or approved.
Neither balance is inherently good or bad.
The question is whether management understands why it exists, whether it is recoverable or supportable, and what it means for future cash flow.
Let’s Connect
Is your WIP schedule helping you operate, or is it only being updated for year-end reporting?
Bilotta & Company’s Contractor Compass® helps construction companies connect job costing, WIP, cash flow, forecasting, and financial reporting into one consistent operating rhythm.
Close → Analyze → Forecast → Decide.