What you should know about over/under billing; work in progress

In construction the process of determining whether your jobs are over billed or under billed each month (or year) has a big impact on the financial statement.

If it's the end of the tax year, it can impact how much you owe in taxes as well. Do you have to wait until March or April 15 to know whether you were profitable or not? What does being "overbilled" or "underbilled" mean anyway, and why is it important when running a construction company?

I get a lot of calls on this topic. Some clients compile this information every month; others wait for midyear bank financials or year-end tax preparation.

Overall, the idea of these reports is to review the progress of the job and confirm you're on track to meet your profit goals. From the accounting standpoint, it's a way to smooth out the "timing" problems with costs and billing.

When a progress bill is put together, the PMs are often projecting how far they'll be by the end of the month. This includes what size crews they're scheduling; what materials will be on the site and/or "in the wall"; what subcontractors are expected and when they say they'll start or finish their work. Sometimes this estimate is done 5, 10, or even 15 days before the end of the month.

Then reality steps in - the crew didn't make the production rate; the materials - weren't delivered on time; the subcontractor didn't get as far as they expected; the weather was uncooperative; or maybe you blew past all the estimates and got way further than expected.

The over/under billing review compares what expenses actually hit in the month compared to the budgeted expenses for the project (including approved change orders). What percent of the budget has been used? Strictly doing the math, that would indicate what percent of the contract you would have earned.

Now you need the PMs to weigh in. Is the calculated percent complete (costs versus budget) a true reflection of how the job is going? Does it say 85% complete but due to overruns or problems the job is really 75% complete?

Or does it say 90% complete but they're actually done and came in under budget?

Don't change the budgets, by the way; this is not the way to handle this. And don't waste time entering internal change orders. Print the report to Excel and carefully make adjustments. Be careful: The PM may say they'll be ahead of budget, but if the job isn't very far along, a lot can happen; better to be a little conversative than to have to explain reduced profit a few months from now.

When you compare that to the actual billing to-date, you are either underbilled (got more done that you estimated or were allowed to bill), or overbilled (didn't get as far as you expected).

Being overbilled is not bad, by the way. In fact, it helps your cash flow. Being underbilled is not bad, but can adversely impact cash if it keeps happening. Remember, they're holding retention, so you won't have all that cash as it is. You need to pay those suppliers if you're going to get the waivers you need, so a little overbilled is not bad at all, if you can get it.