Construction Accounting: What Is Overbilling?

Updated: Oct 17

Updated: Sep 20th, 2022

Overbilling and underbilling appear to be common construction accounting terms. However, not all contractors understand why these concepts are important to their projects. It was not until the contractors' project was delayed due to late payments that they realized the significance of overbilling.

This blog post will explain what overbilling is and how it can affect your construction firm.

Construction Accounting: What is Overbilling?

What is Overbilling?

Overbilling happens when a contractor charges his clients for labor and material fees before the work is done. For example, a contractor might complete 40% of a project but bill their customer for 60% during a billing cycle. That extra 20% is the amount overbilled.

Why Do Contractors Need To Overbill Their Customers?

It is usual and acceptable for a contractor to bill clients in advance. This billing in excess of costs enables contractors to efficiently control spending. The contractors might use this amount to keep the project on schedule with the assurance that the work will be finished in a fair amount of time. Overbilling, for example, assists contractors in avoiding upfront material payment loans. It can also be used to cover work-related expenses. After all, a contractor should have money to pay for labor, materials, and other fees.

Unfortunately, the construction industry is not as simple and easy as its theory states. Indeed, late payments appear to be notoriously slow and common in the industry. To keep ahead of the project, it is a smart practice for contractors to overbill. They will be able to avoid negative cash flow and costly time bottlenecks.

Why Should Contractors Be Careful With Overbilling?

You certainly strive to be an excellent contractor. A good contractor will generally delight his clients by bidding on the task fairly from the start, charging as few extra expenses as possible, and completing the work on schedule. You don't want to be known as a terrible contractor that overcharged the client and failed to reach the agreed-upon deadlines. As a result, ensure that you understand how to handle overbilling effectively. So, by the end of the project, you will have earned your revenue and satisfied your clients.

To Conclude

Overbilling only becomes a problem when a contractor is unaware of having overbilled on a project. Then, as the job nears completion, he is caught by surprise and forced to endure a period of negative cash flow. The most successful construction firms often have strong financial and accounting teams. These individuals will keep a daily eye on project spending, development, and cash flow.

Let CCA Help You

If you're confused about overbilling but still want to succeed in your project, let CCA assist you. Construction Cost Accounting helps you solve construction accounting problems, we are the leader in accounting services for the construction industry. Contact us now for a free consultation.

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