In addition to reviewing standard financials and cash flow statements each month, the most successful contractors also regularly examine Over/Under Billing reports. These billing reports are necessary for proper revenue recognition, plus they help contractors to stay on top of billings and secure required project bonding.
Running frequent Over/Under Billing reports helps contractors see where each of their jobs stands. This provides a more accurate snapshot of each job’s financial health and a better overall financial picture so proactive changes can be made when needed.
When reviewing month-to-month over/under billings, contractors should pay attention to significant fluctuations. Over billing has its advantages, such as using the project owner’s capital instead of the contractor’s, but it can also indicate “job borrow”— using cash from one job to fund another job. Eventually, that will bring a contractor down. Under billing, meanwhile, can lead to serious cash flow problems and should therefore prompt a thorough review of why incurred costs have not been billed. Are there unprocessed change orders out there? Is there a problem with billing practices?
Smarter billings. Both over and under billing scenarios are equally common. Ideally, a contractor wants to remain as close to being on target as possible.
For example, take a job that has an estimated cost of $80,000 with a contract fee of $100,000. If the project is 50% complete, the contractor should have billed $50,000, or 50% of the contract amount. If the contractor billed the project owner $60,000, the job is over billed, which can give a false impression of profitability. On the flip side, if the same contractor billed $40,000 then they are under billed, shorting themselves on cash flow.
Secure Project Bonding. Over/Under Billing reports also play a key role in the bonding process. Many project owners offset their risk by requiring contractors to obtain bonding to work on their projects, especially for large jobs or government projects. Bonding agents require this information to ensure accurate job reporting and to verify that jobs are finished according to contract.
Software for Instant Reporting. Good construction-specific accounting programs make running Over/Under Billing reports extremely easy.
Financials can be updated automatically so these reports are up-to-date and accurate, reflecting true over/under billing activity.
Unlike basic accounting packages that do not have the ability to store (or track) original estimates, contract amounts or change orders to estimates and contracts, sophisticated job cost accounting systems do. This enables the contractor to determine a job’s percentage of completion, the basis for the over/under billing report.
Let’s take a look at what goes into creating over/under billing reports via generic accounting software. The steps would typically include:
- Gathering numerous system and spreadsheet reports by job, including: estimates and change orders, accounts payable reports (sometimes broken down by overhead, materials and equipment), payroll reports and billing reports for the period.
- Calculating actual costs in prior years and revenue earned in prior years (if a job spans multiple years).
- Creating a spreadsheet and manually entering data, job by job.
- Determining the percent complete for each job.
- Finally, computing the over billings and under billings for each job and updating the financials.
It’s a complicated process, even for the smallest contractor. With a sophisticated job cost accounting system, however, the process might look more like this:
Costs and billings are allocated to jobs at the time of entry. Over/under billing is simply a calculation based on the data that has been entered, so running the report is easy. Once the report has been run, you can simply post the data to have it reflected in your financials. It’s usually that simple.
Contractors can regularly review Over/ Under Billing reports with the help of construction specific software. Doing so will give them confidence in knowing the true financial status of their company, amplify their chances of obtaining bonding, and ultimately increase a contractor’s efficiency and profitability.
*A version of this article was originally published in Builders Exchange Magazine.