This isn’t a David Letterman “Top 10” list and this is no laughing matter; this is more important. Underbillings on a construction company’s balance sheet is not a good thing.
Underbillings to a surety or a banker may merely represent work performed but not yet compensated or costs capitalized but not yet reimbursed. However, if a contractor is underbilled by only 10% of their total assets, it can be seen as high compared to industry averages. Although underbillings are common in the construction industry, and sometimes justified, it is important to understand why they occur so management can manage the business and cash flow appropriately.
So drumroll please – The following are the top 10 reasons why a contractor is underbilled on a project:
- Estimated costs at completion for individual contracts are understated on the work-in-process schedule. This represents hidden job loss and results in an overstated revenue and profit.
- Job costs include stored materials that cannot be billed.
- Not completing the progress billings on time.
- Not including retainage in your billed-to-date-figure on the work-in-process schedule.
- Cost shifting from closed jobs to open jobs resulting in a greater percentage of completion on the open job.
- Time and material contracts – work incurred but not billed until work is complete.
- Accepting subcontractor billings for work not completed or materials not installed.
- Incorrect estimating of work to be completed from the pencil copy invoice through the end of the month.
- Dispute over the degree of completion.
- Unapproved change orders/claims included in the total contract on the work-in-process schedule.
Construction companies need to work and communicate with their field and accounting staff to instill processes and controls that help minimize the amount of underbillings on projects – it can be done. It actually might be nice to even be overbilled. A key indicator of a healthy contractor is have no net underbillings and have net overbillings in excess of 2% of annual revenue.
If you would like to learn more about how underbillings affect your ability to get bonding, bank lines of credit and/or cash flow, please contact me at email@example.com.