In the bustling world of construction, underbilling often gets neglected. However, it's a phenomenon with significant implications for both your surety and your construction enterprise.
What is underbilling? - It's when you're paid less than the actual work done.
Consider "XYZ Construction," a company that took on a project to build a commercial complex. They estimated the project would cost $2 million and billed the client accordingly.
As the project progressed, they realized that due to unforeseen complexities in the foundation work, the cost increased by $500,000. However, XYZ didn't update the billings to reflect this additional cost.
So, even though they had finished 50% of the job, which was worth $1.25 million, they only charged the client $1 million. XYZ Construction was $250k short on bills. This difference meant that they had less cash flow to run their business, which made their surety nervous about how they were handling their money.
In both cases, underbilling puts a strain on the business's finances and may raise questions about its ability to handle costs and keep contracts. This is why it's important for building companies to catch underbilling quickly and fix it.
The Underbilling Phenomenon and Its Impact
Sureties may see underbilling as a warning sign, indicating potential cash flow issues. They might begin to question whether you have sufficient funds to complete the project as agreed. In extreme cases, underbilling could even lead people to question whether you can fulfill your contractual obligations. This could result in sureties ramping up their controls, potentially impinging on your ability to secure bonds and bid on future projects.
Beyond the financial impact, underbilling can also complicate the cost estimation of a construction project, distorting your profit calculations. Underbilling can lead to mismanaged cash flow, triggering a chain reaction of financial issues that worsen your business's health.
Common Reasons for Underbilling
Underbilling can stem from various factors.
The primary one is billing based on the contract amount, not the actual cost incurred or work performed.
Errors in the estimation process can also lead to underbilling, as can overly aggressive bidding strategies.
This problem can also happen if you don't keep your accounting system up-to-date on the progress of a project or if you don't give enough thought to how much it will cost to make changes to a project.
The CCA Approach: Navigating the Underbilling Waters
To avoid underbilling in the building business, companies need to improve how accurate their figures are, keep up-to-date records on projects, look over contracts often, set up strong billing systems, hold regular training and audits, and ask for help. This will help with cash flow, trust in security, and the financial safety of the business as a whole.
Improve your estimation process
Underbilling can often stem from inaccurate cost estimates. To rectify this, refine your estimation process. Use past data, industry norms, and the advice of experts to make more accurate estimates of how much a project will cost.
For example, if you find that your estimates of labor costs are always lower than the real costs, you might need to change how you figure out costs or how you think about how efficient workers are.
Maintain up-to-date project progress records
Make sure that your project records are always up to date. If you've finished 50% of a job, that should show up in your billing and revenue. Meetings about how the work is going can help keep everyone on the same page about what has been done.
Regularly review contracts
You should look over your contracts often, especially if the scope of work changes. If a client wants more features or changes, you should update your contract and bills to reflect this.
For example, if adding a new floor to a building project changes the scope of a project, you should change your billing to account for the extra work and resources.
Set up a solid billing system
Use solid accounting and project management tools that can track costs, progress, and billing. This will make it less likely that a person will make a mistake and make it easier to spot underbilling.
Use software that syncs your project management data with your financial system, for example, so that all work progress is billed quickly.
Training and Audits
Give your team regular training on how important it is to bill correctly. Internal checks or reviews are another way to find and fix problems with underbilling.
For example, you could do audits once a month or once every three months to see if the amounts paid match the work done.
Get help from an expert
Getting help from a professional is sometimes the best way to stop underbilling. Professional bookkeeping services, like those offered by CCA, know how to handle the unique difficulties and nuances of construction accounting. They can help you make sure your billing fits your work, which will cut down on the number of times you underbill.
For example, CCA can look at how you bill now, find any flaws, and give you ideas on how to fix them so you don't underbill.
At CCA, we aim to do more than just mitigate underbilling. We provide a comprehensive approach to financial management for construction businesses. Our support can help you avoid common financial mistakes in the industry and ensure your revenue accurately reflects the work done, leading to better cash flow management, reduced surety concerns, and a solid foundation for sustained growth.
Are you eager to control underbilling, reassure your surety, and ensure long-term growth? Contact us today, and let's make a significant impact on your business journey.