What is the difference between overbilling and underbilling?

It is a matter of direction. Overbilling, formally billings in excess of costs and estimated earnings, means the contractor has billed the owner for more than the revenue it has actually earned on the work to date. Underbilling, costs in excess of billings, is the reverse: the contractor has earned revenue by doing work and incurring cost but has not yet billed for it. Both are measured the same way, total billings to date minus earned revenue to date, with a positive result being overbilled and a negative result underbilled. The number is computed line by line and summed on the work-in-progress schedule.

Not inherently, and a modest, early overbilling is usually a sign of healthy cash management, since billing slightly ahead of production funds the job without a credit line. The danger is leaning on it. When a contractor overbills heavily, it starts using cash collected on billed-ahead jobs to pay costs on other jobs. That is job borrowing, and it works until the pipeline of new billing slows, at which point there is nothing left to borrow against. More than a few contractors have failed with a healthy-looking bank balance for exactly this reason, which is why lenders and sureties read the billing position carefully.

Where do over- and under-billings show up on the balance sheet?

On opposite sides. Overbillings appear as a current liability, often titled billings in excess of costs and estimated earnings on uncompleted contracts, because the contractor has collected money it has not yet earned and effectively owes that work. Underbillings appear as a current asset, costs in excess of billings, because the contractor has performed work it is still owed payment for. The work-in-progress schedule is the bridge between the job-level billing and these balance-sheet figures, which is why it is the report a construction lender or surety asks to see first.

Construction Glossary · Billing & Pay Apps

Over- & Under-Billing

The gap between what you have billed and what you have actually earned. A small, early overbilling funds the job; a large one can sink a company that still looks profitable.

Definition

Over- and under-billing is the gap between what a contractor has billed to date and the revenue it has actually earned to date. Overbilling means billings run ahead of earned revenue (a balance-sheet liability); underbilling means earned revenue runs ahead of billings (an asset). The difference is tracked on the WIP schedule.

Billed is not earned

On our project, $5.7M has been billed, including $0.3M of stored materials not yet installed. But earned revenue, at 45% of the $12.0M contract, is $5.4M. The job is overbilled by $0.3M.

Billed − Earned = Over/Under
$5.7M − $5.4M = +$0.3M (overbilled)

Two directions, two meanings

Overbilled

Billed ahead of earned revenue. Shows on the balance sheet as a liability (billings in excess of costs and earnings).

A little funds the job. A lot becomes job borrowing: paying today's costs with tomorrow's unearned billings.

Underbilled

Earned revenue ahead of billings. Shows as an asset (costs in excess of billings).

Often just slow billing, but it means the contractor is financing the owner's work, tying up cash it has already earned.

How POD surfaces the billing position

POD reads the amount billed to date from your pay applications and keeps the percent complete beside it, so the inputs a work-in-progress schedule needs stay current instead of going stale between quarterly closes. Striking the over- or under-billed position is still the accountant's call on the WIP schedule, but the numbers that feed it are kept up to date as each application lands.

Construction WIP schedule guide

Frequently asked questions

The billing picture, start to finish

From the schedule of values to the pay application to the billing position, these terms are one chain. Walk it from the beginning.

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