Underbillings and overbillings: how to calculate and read them

Underbillings and overbillings are the column on a work-in-progress schedule that gets the most questions. They compare what a contractor has billed on a job with the revenue the job has earned so far. The arithmetic is simple. Reading it takes judgment, because the same number can mean healthy timing on one job and a problem on another.

This guide covers how the number is calculated, a worked example, what it can mean, and how to explain it when someone asks.

The calculation

On a WIP schedule using the percentage-of-completion method measured by cost:

1. Estimated total cost = cost to date + cost to complete
2. Percent complete = cost to date / estimated total cost
3. Earned revenue = percent complete x contract amount
4. Over / (under) billing = billed to date - earned revenue

A positive result is an overbilling: you have billed more than you have earned. A negative result is an underbilling: you have earned more than you have billed. Schedules usually show underbillings in parentheses.

On the balance sheet, the two are usually shown separately rather than netted. Overbillings are a liability, often labelled "billings in excess of costs and estimated earnings" or a contract liability. Underbillings are an asset, often labelled "costs and estimated earnings in excess of billings" or a contract asset. How they are presented is your CPA's call.

A worked example

Two example jobs, both as of September 30:

The clinic is over billed by 43,200. The warehouse is under billed by 77,500. Net across both, the company is under billed by 34,300, but a reader looks at each job on its own.

What an underbilling can mean

An underbilling says the work in place, measured by cost, is ahead of the invoices. There are ordinary reasons for that:

• Billing timing. The job bills monthly on a pay application, and costs since the last one have not been billed yet.
• Front-loaded costs. Material bought and delivered early for a phase that bills later.
• Change orders in progress. Work done on a change that is approved but not yet billable, or not yet approved.

And reasons a surety or lender worries about:

• Cost overruns. The job is costing more than bid. Cost to date climbs, percent complete looks high, earned revenue follows it, but the owner will only pay against the schedule of values. The underbilling may never be billed.
• An optimistic cost to complete. If the project manager understated what is left, percent complete is too high, and so is earned revenue. The underbilling is partly profit that will not appear.
• Disputed work. Costs on work the owner has not accepted.

So an underbilling is not bad by itself, but a large or growing one, or one on a job that is losing margin, gets questions. The quality of the cost to complete estimate decides how much the number can be trusted.

What an overbilling can mean

An overbilling says the invoices are ahead of the work. Often it is front-loaded billing: a mobilization line or a schedule of values weighted toward early phases. It brings in cash early, which helps, but it is also work still owed to the owner. Readers typically compare total overbillings with cash on hand, to see whether the cash collected in advance is still there to finish the work.

A very large overbilling can also mean cost to complete is overstated, which pushes percent complete and earned revenue down.

Reading it across months

One month's number says less than the trend:

• An underbilling that grows each month on the same job, while the job's estimated profit shrinks, is the pattern most worth catching early.
• Percent complete going down between months means the cost estimate jumped. Look at that job before you send the schedule.
• A job that flips from over billed to under billed may just be a billing lag, or may be the moment overruns showed up.

Explaining it

When an owner, banker or surety asks about an underbilling, the useful answer is specific to the job:

• Is it billing timing? Name the pay application that will bill it and when.
• Is the cost to complete current, and who gave it?
• Is there unbilled change-order work? Is it approved?
• Is the job still expected to make its bid margin? If not, by how much less?

Keep a short note on any job with a large over or under billing. The same question tends to come back next quarter.

Retainage is separate

Retainage is not over or under billing. It is part of billed to date that the owner holds back until a milestone or completion. The amount and when it is released depend on the contract, and in some cases on state law, so check both. The WIP schedule usually shows retainage in its own column so a reader can see how much of billed to date is still to be collected.

Where the number comes from in practice

Every input except cost to complete comes from the books: contract amounts, cost to date and billed to date. If you use QuickBooks Online, the WIP report in QuickBooks guide covers which report to export.

How WIP Monthly shows it

WIP Monthly calculates over and under billing for every job from your QuickBooks Online export and your project managers' cost-to-complete estimates, in whole cents, with the same formulas as above. It shows retainage in its own column and flags the patterns that make an underbilling hard to trust: a missing estimate, percent complete going down, estimated total cost moving more than 10% from last month, and projected losses. You can override any figure with a note before you finalize the month and send the PDF and Excel file.