Welcome to a serious discussion about underbilling in the construction industry. Unlike a lighthearted ESPN “Top 10” list, underbilling isn’t a joke. It’s a significant issue that affects the financial health of contractors. When work is done but not yet paid for, or costs are incurred but not reimbursed, it creates underbillings. If a contractor’s underbilling reaches 10% of their total assets, it’s considered high compared to industry standards. While underbilling is common in construction, understanding its causes is crucial for effective business and cash flow management.
So, without further ado, let’s delve into the top 10 reasons why contractors experience underbilling on projects.
- Estimated costs at completion for individual contracts are understated on the work-in-process schedule. This represents a hidden job loss and results in overstated revenue and profit.
- Job costs include stored materials that cannot be billed.
- Not being able to complete 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 are included in the total contract on the work-in-process schedule.
Construction companies must collaborate and communicate with their field and accounting staff to instill processes and controls that help minimize the amount of underbillings on projects. A key indicator of a healthy contractor is having no net underbillings and having 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, contact a member of our team.
