What Is Overbilling vs. Underbilling in Construction?
In construction, billing and earned revenue are not the same thing.
A project is generally overbilled when cumulative billings exceed the amount of revenue earned to date.
A project is generally underbilled when earned revenue exceeds cumulative billings.
Neither position is automatically good or bad.
The important question is:
Why does the difference exist, and what does it tell management about the project?
What Is Overbilling?
Overbilling occurs when the contractor has billed the customer more than the amount of revenue earned based on project progress.
For example:
Earned revenue to date: $800,000
Billings to date: $950,000
Overbilling: $150,000
The contractor has billed $150,000 ahead of earned revenue.
This can create positive short-term cash flow, but the $150,000 is not additional profit.
The company still has future work and costs to complete.
What Is Underbilling?
Underbilling occurs when the contractor has earned more revenue than it has billed.
For example:
Earned revenue to date: $800,000
Billings to date: $650,000
Underbilling: $150,000
The project has generated $150,000 of earned revenue that has not yet been billed.
That can create cash-flow pressure because the contractor may already have incurred labor, materials, subcontractor, and other project costs without yet billing the customer for the related work.
How Are Overbillings and Underbillings Calculated?
A simplified calculation is:
Billings to date − Earned revenue to date
If the result is positive, the project is overbilled.
If the result is negative, the project is underbilled.
For example:
Billings to date: $1,200,000
Earned revenue: $1,050,000
Overbilling: $150,000
Or:
Billings to date: $900,000
Earned revenue: $1,050,000
Underbilling: $150,000
The key input is earned revenue, which usually depends on the contractor's WIP and revenue-recognition process.
Why Is Earned Revenue Different From Billing?
Billing is driven by the contract.
Earned revenue is driven by the accounting for project performance.
Billing may depend on:
project milestones;
monthly applications for payment;
scheduled values;
customer approval;
retainage;
change orders;
contractual billing terms; or
other requirements.
Earned revenue reflects how much of the project has been performed under the applicable accounting method.
That is why a job can be overbilled or underbilled even when all invoices have been prepared correctly.
Is Overbilling Good?
Overbilling can be positive from a cash-flow perspective.
Billing ahead of earned revenue can help finance:
labor;
materials;
subcontractors;
equipment;
overhead; and
future project costs.
But overbilling should not be confused with profit.
A contractor that is significantly overbilled may have received cash that will be needed to complete future work.
If that cash is spent elsewhere, the project can create a liquidity problem later.
The better question is:
Do we understand why we are overbilled, and do we have sufficient resources to complete the remaining work?
Can Overbilling Be a Warning Sign?
Yes.
Some overbilling is normal and may reflect strong billing discipline.
But unusually large overbillings may deserve attention.
Management should ask:
Is the job actually progressing as expected?
Are estimated costs to complete accurate?
Are future project costs fully reflected?
Is cash from this project being used to fund other jobs?
Are there significant unrecorded commitments?
Is the current margin estimate realistic?
If estimated costs are understated, the company may appear more overbilled and more profitable than it really is.
Is Underbilling Bad?
Not necessarily.
A temporary underbilling may simply reflect normal billing timing.
For example, work may have been performed near month-end but the next billing application has not yet been submitted.
Underbilling may also result from:
contractual billing milestones;
retainage;
approved work not yet included on an invoice;
normal billing-cycle timing.
Those situations may be reasonable.
Persistent or growing underbillings are more concerning.
Why Can Underbilling Be a Red Flag?
Significant underbilling can indicate:
billing delays;
missed billing opportunities;
unapproved change orders;
customer disputes;
incomplete documentation;
weak project administration;
cost overruns;
inaccurate WIP estimates; or
collectability issues.
A contractor may appear profitable on the income statement while cash becomes increasingly constrained.
That is why underbilling deserves active management attention.
Change Orders Can Create Underbillings
Change orders are a common source of construction underbilling.
The contractor may have:
performed the work;
incurred the cost;
updated the expected project economics;
but still be waiting for formal customer approval before billing the change. Hopefully not, but it happens.
If pending change orders become material, management should understand:
how much work has been performed, and why;
how much cost has been incurred;
whether the change is approved;
whether the customer disputes the amount;
when billing is expected; and
whether collection is probable.
Large unresolved change orders can create both accounting and cash-flow risk.
Retainage Is Different From Underbilling
Retainage and underbilling are related to cash flow, but they are not the same thing.
Retainage is an amount billed or earned that the customer holds back until specified contractual conditions are met.
Underbilling generally means the amount earned exceeds the amount billed.
A contractor can therefore have:
accounts receivable;
retainage receivable;
underbillings;
all at the same time.
Management should monitor each separately.
How Do Overbillings and Underbillings Affect the Balance Sheet?
Depending on the applicable accounting framework and terminology, underbillings and overbillings generally appear as contract-related assets or liabilities.
An underbilling represents an amount the contractor has earned but has not yet billed.
An overbilling generally represents billings received or issued ahead of earned revenue.
These balances connect the WIP schedule to the company's financial statements.
Large changes should be understood and reconciled.
How Do They Affect Cash Flow?
Overbilling can create cash before the related profit is fully earned.
Underbilling can consume cash before the contractor has an opportunity to bill the customer.
For example:
A contractor incurs:
$300,000 of payroll;
$200,000 of materials; and
$250,000 of subcontractor costs.
If the project is materially underbilled, the contractor may be financing much of that activity from its own working capital.
That can create pressure even on a profitable job.
Overbilling Can Mask Future Cash Needs
Suppose a contractor has $2 million of cash in the bank.
That may appear strong.
But if a meaningful portion of that cash came from large project overbillings, the company also has obligations to perform future work.
Leadership should therefore look beyond the bank balance.
Ask:
How much cash is supported by completed, profitable work?
and
How much effectively needs to fund remaining project obligations?
This is one reason WIP and cash forecasting should be reviewed together.
Underbilling Can Signal Working-Capital Pressure
Underbillings often represent cash the contractor has effectively financed on behalf of the customer.
As underbillings grow, the business may need additional:
working capital;
line-of-credit capacity;
owner capital; or
cash generated by other projects
to support operations.
Large underbillings across multiple projects can become a company-level liquidity issue.
What Should Contractors Review Each Month?
For every material overbilling or underbilling, management should ask why it exists.
For Underbillings
Ask:
Has all completed work been billed?
Are billing applications current?
Are change orders delaying billing?
Is documentation incomplete?
Are there contractual billing restrictions?
Is there a dispute?
Is collection likely?
Is the cost-to-complete estimate accurate?
For Overbillings
Ask:
What future costs remain?
Is the project margin still realistic?
Are committed costs complete?
Is sufficient cash being preserved?
Has the project been billed unusually far ahead?
Are there operational risks that could consume the advance billing?
The answer should be project-specific.
Look at Trends, Not Just One Month
A single underbilling balance may not be significant.
A growing trend may be.
For example:
January underbilling: $50,000
February: $110,000
March: $190,000
April: $325,000
That trend deserves attention.
Likewise, a project becoming increasingly overbilled while expected margin declines could signal future cash pressure.
Management should compare the current period to prior months rather than reviewing each WIP schedule in isolation.
Set Exception Thresholds
Contractors can make monthly WIP reviews more efficient by establishing thresholds.
For example, investigate:
underbillings greater than $100,000;
underbillings older than one billing cycle;
overbillings above a defined percentage of remaining project cost;
material month-over-month changes;
balances associated with disputed change orders; or
any project where billing position does not make operational sense.
The exact thresholds should reflect the company's size and project portfolio.
How Do Sureties View Overbillings and Underbillings?
Sureties may review billing positions as part of their analysis of a contractor's WIP and financial condition.
Large or unexplained underbillings can raise questions about:
billing discipline;
project profitability;
collectability;
estimating;
working capital; and
project management.
Overbillings can support cash flow, but sureties may also consider whether the contractor has sufficient resources to complete the related work.
The underlying explanation matters more than simply labeling one balance good and the other bad.
How Do Banks View Them?
Banks may also consider overbillings and underbillings when evaluating:
working capital;
borrowing needs;
lines of credit;
liquidity;
receivable quality; and
financial trends.
A Simple Example
Assume a contractor has a $2 million project.
Estimated total cost: $1.6 million
Costs incurred to date: $800,000
The project is therefore approximately 50% complete using a simplified cost-to-cost approach.
Earned revenue:
$2,000,000 × 50% = $1,000,000
Scenario A: Billings of $1.2 Million
Earned revenue: $1,000,000
Billings: $1,200,000
Overbilling: $200,000
The contractor has billed ahead of earned revenue.
Scenario B: Billings of $800,000
Earned revenue: $1,000,000 (doesn’t change)
Billings: $800,000
Underbilling: $200,000
The underlying job economics are identical.
Only the billing position has changed.
That illustrates why billing, revenue, profit, and cash should not be used interchangeably.
Common Overbilling and Underbilling Mistakes
Common problems include:
assuming all overbilling is good;
assuming all underbilling is bad;
failing to investigate aging underbillings;
ignoring pending change orders;
relying on outdated cost-to-complete estimates;
treating advance billings as profit;
failing to connect billing position to cash forecasting;
failing to reconcile WIP to the general ledger; and
reviewing balances without understanding the operational cause.
The accounting number is the starting point.
The explanation is where the management value comes from.
The Bottom Line
Overbillings and underbillings arise because billing and earned revenue do not always move at the same pace.
Overbilling: Billings exceed earned revenue.
Underbilling: Earned revenue exceeds billings.
Neither position should be judged in isolation.
Contractors should understand:
why the balance exists
whether it is growing
whether it reflects normal billing timing
whether it creates cash-flow risk
and
whether it signals a deeper project issue.
Reviewed as part of a disciplined monthly WIP process, overbillings and underbillings become more than accounting balances.
They become indicators of project performance, billing discipline, working-capital needs, and financial risk.
How Bilotta & Company Can Help
Bilotta & Company, CPAs, LLC works with construction contractors on WIP reporting, job-cost analysis, financial statement assurance, accounting, tax, cash-flow forecasting, and financial leadership.
Through our Contractor Compass® Financial Stewardship program, we help contractors connect project-level information to company-level financial decisions.
That means looking beyond whether a job is overbilled or underbilled and asking what that position means for:
margin
cash
working capital
bonding
and
the decisions leadership needs to make next.
Our Financial Stewardship as a Service® rhythm is:
Close → Analyze → Forecast → Decide.
Related Resource: What Is a Construction WIP Schedule? →
Related Resource: How Often Should Contractors Update Their WIP Schedule? →
Visit the Construction Contractor Financial Resource Center →
This article is provided for general educational purposes and should not be considered accounting, tax, legal, bonding, lending, or financial advice for a specific contractor or construction contract.