Underbillings and Overbillings: What They Reveal About Your Construction Company’s Financial Health

In construction, reported profit does not always translate into cash in the bank. A contractor may have a strong backlog, profitable projects, and growing revenue while still experiencing liquidity challenges.

One of the most important indicators of both project performance and cash flow health is the relationship between revenue earned and amounts billed to project owners. These balances commonly appear on a contractor’s Work-in-Progress (WIP) schedule as underbillings (costs and estimated profits in excess of billings) and overbillings (billings in excess of costs and estimated profits).

When viewed alongside gross profit trends, backlog, and project schedules, underbillings and overbillings can provide valuable insight into estimating accuracy, billing practices, project execution, and overall financial health.

What Are Underbillings?

An underbilling occurs when a contractor has recognized more earned revenue than has been billed to the owner. An underbilling is generally reported as a current asset on the Company’s balance sheet.

For example, if a project is 50% complete and has earned $500,000 of revenue based on costs incurred and estimated progress, but only $425,000 has been billed, the project would report an underbilling of $75,000.

On a WIP schedule, underbillings generally represent earned but unbilled revenue. In many cases, they reflect legitimate timing differences associated with billing cycles, retainage provisions, pending approval of change orders, or contractual billing restrictions.

However, persistent or growing underbillings often deserve management attention because they can indicate project execution or billing challenges that convert earned revenue into delayed cash collections.

What Are Overbillings?

An overbilling occurs when billings to date exceed earned revenue. An overbilling is generally reported as a current liability on the Company’s balance sheet.

For example, if earned revenue on a project is $500,000 and billings total $575,000, the project would report an overbilling of $75,000.

Overbillings effectively represent cash received in advance of future project performance and can provide an important source of working capital. Many successful contractors intentionally manage contract terms and billing practices to maintain reasonable overbilling positions throughout a project’s life cycle.

While overbillings generally support liquidity, unusually large overbillings may warrant further review, particularly when combined with declining profit margins, project delays, or deteriorating cost forecasts.

Why Underbillings and Overbillings Matter

Construction companies often finance labor, subcontractors, materials, and equipment costs before receiving payment from owners. As a result, the timing difference between earned revenue and billings can significantly impact cash flow.

Excessive underbillings can force contractors to fund projects internally, increasing reliance on operating lines of credit and reducing available capital to pursue new opportunities.

Conversely, well-managed overbillings can improve liquidity, support working capital needs, and reduce borrowing requirements.

For contractors, the goal is not necessarily to eliminate underbillings or maximize overbillings. Rather, management should understand the drivers behind these balances and ensure they align with project performance and billing strategies.

Key Factors Associated with Underbillings

While some underbillings are expected, significant or recurring balances may indicate issues that warrant investigation.

1.     Delayed Pay Applications

Project teams may not be submitting pay applications timely, resulting in earned revenue accumulating faster than billings.

• Unapproved Change Orders

One of the most common causes of underbillings is performing work before change orders are approved. As costs accumulate, revenue may be recognized while the contractor remains unable to bill the owner.

•     Cost Estimate Deterioration

When estimated costs to complete increase, earned revenue calculations can become distorted. Growing underbillings may signal inaccurate forecasting or emerging project challenges.

• Revenue Recognition Concerns

Large underbilling balances can occasionally indicate overly optimistic estimates of project completion or earned revenue that may not ultimately convert to billable amounts. In this case, a reserve on underbillings may be necessary if revenue recognized may not be convertible to billable amounts. 

• Working Capital Strain

Underbillings tie up cash in ongoing projects and may reduce financial flexibility, bonding capacity, and the ability to pursue additional work.

Key Factors Associated with Overbillings

Although generally viewed more favorably than underbillings, overbillings should also be evaluated carefully.

•     Front-End Loaded Billing

Some contracts allow contractors to bill a disproportionate amount early in the project. While beneficial for cash flow, these structures can create margin pressure later if project costs exceed expectations.

• Changes in Profitability Forecasts 

Large overbilling balances should be evaluated alongside projected gross profit and cost-to-complete estimates. While overbillings often reflect favorable billing terms and strong cash flow, they can also highlight favorable changes in expected project margins. As a project progresses, conservative cost estimates may lead to profit gains and significant overbillings. 

• Future Cash Flow Compression

Large overbilling positions often reverse as projects near completion. Contractors that rely heavily on overbillings across multiple projects can experience liquidity pressure when the volume of new work slows.

• Owner and Lender Scrutiny

Aggressive billing practices may increase review by project owners, sureties, lenders, and other stakeholders, particularly if supporting project documentation is insufficient.

Best Practices for Managing Underbillings and Overbillings

Successful contractors actively monitor WIP schedules throughout the year rather than waiting until year-end.

Key practices include:

• Reviewing WIP schedules monthly
• Comparing earned revenue, billings, and gross profit trends for each project
• Monitoring gain and fade reports to identify estimating or execution issues
• Tracking pending and approved change orders separately
• Requiring regular cost-to-complete updates from project managers
• Investigating significant underbilling and overbilling fluctuations
• Coordinating project management, operations, and accounting teams to ensure accurate forecasting
• Evaluating cash flow projections alongside backlog and project schedules

Looking Beyond the Numbers

Underbillings and overbillings are more than balance sheet accounts. They often provide an early warning system for issues involving project execution, estimating accuracy, billing practices, and cash flow management.

When evaluated alongside WIP reporting, job profitability, and backlog trends, these balances can help contractors identify risks sooner, improve forecasting accuracy, and make more informed operational decisions.

The contractors that consistently generate strong cash flow are not necessarily the ones reporting the highest profits. They are often the contractors that maintain disciplined project controls, accurate cost forecasting, timely billing practices, and a thorough understanding of what their underbillings and overbillings are telling them about the health of their business.

At GreerWalker, we work with contractors and construction companies to evaluate project performance, improve financial visibility, and identify opportunities to strengthen cash flow management. Understanding trends within your WIP schedules and financial statements can provide valuable insight into the overall health of your business and support more informed decisions as you continue to grow.