Overbilling occurs when the contractor bills contracted workers and materials under the contract before the work is completed.
For example, in one billing cycle, a contractor has completed 50% of projects for clients but their clients have to pay 70% instead of 50%. The difference of 20% is the overbilled amount.
What does overbilling mean for the contractor?
It can be said that overbilling plays a positive role for the contractor, especially in the construction industry when delay payments often occur in the construction industry. Thanks to the overbilling, the contractor can try to stay ahead of the project cash flow, helping to offset the potential negative impact on cash flow caused by a late-paying customer.
Most contractors try to overbill a little more if possible. Sometimes, the price of a job is so high that the estimated cost of completing the job exceeds the remaining unpaid contract balance. However, contractors also need to be careful with overbilling. The significant overbilling will likely become an issue that leads to a scenario called “job borrow”. If the timetable is extended during the project and the company is so far ahead of schedule that the estimated cash cost of completing the project exceeds the number of funds remaining in the project, the company will have a job borrowing scenario.
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