Every construction project has its own problems. Many of the big challenges that construction companies face are managing costs, timelines, and change orders while staying profitable.
Fortunately, a WIP report or WIP schedule, along with the percentage of completion method, can help you overcome these challenges by improving your cash flow and ensuring accurate billing. In this article, we will delve into the specifics of overbilling and underbilling in your WIP schedule, highlighting sound billing techniques so you can stay on track and avoid any negative impacts on your project's progress.
Download your Over & Under Billing PDF here:
WIP Report: What is Over/Underbilling?
Overbilling | Under Billing |
|---|---|
Contract liability = billing on the excess of costs | Contract asset = costs in excess of billings |
Overbilling refers to the practice of billing more than the actual work completed. | Underbilling occurs when a contractor bills less than the actual work completed. |
Overbilling means the construction is using the client’s money, and not their own | Underbilling means the contractor (you) is financing the project. |
Overbilling is optimal for cash flowing into the project | Underbilling hurts cash flow. |
The Good Side of Overbilling
Construction companies typically overbill at the start of a project. The reason is simple, you want the cash in hand to complete your project. Companies overbill to help offset the negative cash flow due to slow payments (a common norm in the construction industry, unfortunately).
It's always preferable to obtain your cash sooner rather than later! As long as you know exactly the amount that has been overbilled on the job, and has good practices to manage the cash to cover the period towards the end of the project, then you are doing great! (though large and constant overbilling can cause many issues which we won't mention here.)
Instead, from now until the end, we will show you why underbilling is never- a good thing!
What Causes Underbilling?
Underbilling |
❓Could it be caused by a pending litigation situation? |
❓Are you doing work for a pending change order that hasn’t been processed yet? |
❓Or is the underbilling due to a potentially bad estimate? |
Why is Underbilling Never a Good Thing?
Underbilling is truly a problem because when a project is underbilled, you are submitting invoices for less money than you have actually earned.
From the typical cash-is-king perspective in the construction industry, underbilling can have a significant negative impact on the cash flow and eat into your profit.
How Over/Underbilling is Calculated in WIP Report
Download your Over & Under Billing PDF here:
Sound Billing Techniques To Prevent Underbilling
These techniques are provided by the Construction Financial Management Association.
1. Follow Contract Documents:
Submit billing in accordance with the contract documents.
The process usually requires a Pencil Draw or Draft review by the owners’ representatives to verify the billing is for work in place.
2. Submit Schedule of Values:
Before any construction starts, submit a schedule of values.
The schedule should be reviewed and approved by the client’s team, owners, architects, and owner representatives.
3. Monitor Pencil Draw:
The contractor’s team should monitor the Pencil Draw to ensure it is moving through the proper channels.
Determine early on if any changes are needed.
4. Submit Formal Billing:
Once the Pencil Draw is approved, submit a formal billing.
5. Ensure Payment Process:
The project team should ensure the billing is moving through the client's payment process and not getting hung up on someone’s desk.
In Conclusion,
Underbilling can have a significant negative impact on cash flow in construction projects and profitability. It's crucial to implement sound billing techniques and regularly review work-in-progress schedules to prevent underbilling.
By working with CCA, you can stay on top of your billings and focus on the construction site, knowing that your finances are being managed effectively.