Over-Billing vs. Under-Billing: The Two Most Important Numbers on Every Construction WIP
Over-billing and under-billing are the balance-sheet items that most construction accountants spend a surprising amount of their time thinking about. They exist because of how construction revenue recognition works: revenue is earned as work progresses, but billings happen on a separate (usually monthly) cycle driven by the pay application schedule. The difference between what has been billed and what has been earned is where these two items live.
Mathematically, the definitions are simple. Over-billing is when billings exceed earned revenue (the company has billed for more than it has performed). Under-billing is when earned revenue exceeds billings (the company has performed more than it has billed for). Both show up on the balance sheet — over-billings as a liability, under-billings as an asset — and both are normal in healthy operations. The question is always about magnitude and trend, not existence.
Under US GAAP, the formal balance sheet labels for these items are:
The accounting names for over-billings and under-billings
- Billings in excess of costs and estimated earnings on uncompleted contracts — this is the over-billing liability
- Costs and estimated earnings in excess of billings on uncompleted contracts — this is the under-billing asset
- Under ASC 606, the terminology shifted slightly to 'contract liability' (over-billing) and 'contract asset' (under-billing), though the underlying calculation is the same
The accounting names describe exactly what the items are. Over-billing is money the customer has paid for work not yet performed — that's a liability because the company owes the performance. Under-billing is work performed but not yet billed — that's an asset because the company has the right to collect for the work done.
At each reporting date, the calculation runs project by project. For a given contract: earned revenue equals contract amount times percent complete (usually costs-to-date divided by total estimated costs). Billings to date is the cumulative amount billed through pay applications. If billings > earned, the project is over-billed by the difference. If earned > billings, the project is under-billed.
Example: a $5M contract with total estimated cost of $4M. Actual costs to date = $1.6M, so percent complete = 40%. Earned revenue = $5M × 40% = $2M. Billings to date = $2.3M. This project is over-billed by $300K — the company has billed $300K more than it has earned based on progress.
Same contract, different facts: actual costs to date = $2M (so 50% complete). Earned revenue = $2.5M. Billings to date = $2.2M. This project is under-billed by $300K — work performed but not yet billed.
Over-billing gets a bad reputation because the word 'over' sounds like excess. In reality, moderate over-billing is a healthy financial management practice on most projects. Subcontractors typically bill their pay applications on the 20-25th of each month based on expected progress through month-end. By the time the pay app is submitted, approved, and paid (30-45 days later), some amount of work that was estimated for the billing period may not have happened yet, but the billing has been issued.
Similarly, mobilization line items typically front-load billings. A sub whose mobilization is 5% of contract value ($50K on a $1M contract) bills that entire amount in the first month even though the mobilization itself is spread across the first few weeks. Stored material billings also create front-loading — materials on site but not yet installed are billed and paid, then the installation shows up in later periods as additional earned revenue.
A mild over-billing position across the portfolio reflects prompt billing, efficient cash management, and front-loaded mobilization — all signs of a well-run operation. Problems arise when the over-billing is large relative to the portfolio, growing faster than the underlying business, or concentrated in specific projects rather than distributed.
Under-billing is usually the more concerning position. It means the company has performed work but hasn't gotten the billing out. The causes fall into a few categories: pay applications that haven't been submitted yet because of approval workflow delays; change order work that hasn't been formally approved and therefore can't be billed; scope that's being performed on a dispute basis where billing will come later; or simply slow internal billing cycles.
Under-billing is a direct cost. Every dollar of under-billing is a dollar of working capital the company is financing for the customer at no interest. A construction company with a $5M aggregate under-billing position and a 10% cost of capital is effectively giving away $500K per year in financing to customers — at exactly the margin that represents meaningful profit.
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Looking at individual projects is useful, but the critical question is the portfolio aggregate. On any given day, some projects will be over-billed and others under-billed. The balance sheet shows the net — billings in excess of costs (the aggregate over-billings) and costs in excess of billings (the aggregate under-billings) — but serious analysis looks at the gross amounts individually.
For a healthy mid-market GC, the typical pattern is modest aggregate over-billings (maybe 3-8% of trailing twelve months' revenue) with under-billings much smaller. A company with large gross under-billings masked by large gross over-billings at the portfolio level is concentrating risk — some projects are running ahead in billings while others lag in collection, and the average hides the tails.
Sureties — the companies that issue performance and payment bonds — are the most sophisticated analysts of WIP data in the industry. They look at over-billing and under-billing positions as leading indicators of project health and company health.
What sureties watch for in over/under-billing data
- Aggressive over-billing — signals the company may be pulling cash forward to fund operations, with future work yet to be earned
- Large under-billings concentrated in a few projects — signals approval friction, change order disputes, or slow internal billing
- Over-billing positions that haven't earned down as expected — the project is behind schedule or has hidden problems
- Changes in the over/under ratio over time — deteriorating trends, especially when combined with estimate revisions, are red flags
A company with clean, well-explained over/under positions gets better bonding treatment than one with murky numbers. The difference shows up in bonding capacity (how much bonded work the surety will support) and premium rates. On large public projects, bonding capacity is a direct constraint on what the company can bid.
Common reasons for concerning over/under-billing patterns
- Change orders performed but not yet formally approved — work done, cost incurred, but can't be billed without approval
- Cost estimates that haven't been updated to reflect cost increases — billings stay the same while earned revenue is overstated
- Mobilization lines billed but never 'earned down' with actual work — the project stalls and the mobilization billing stays over-billed
- Slow pay-app approval cycles internally — billings lag even though costs are being incurred
- Front-loaded schedules of values that owners approved without realizing the structure
- Retainage-release timing — retainage accrued but not yet released can shift over-billed positions significantly at release
The levers to manage over and under-billing are mostly operational rather than accounting. Getting pay apps out on time, following up on approvals, tracking change orders from approval to billing, and keeping cost estimates current — these are the activities that produce a healthy portfolio position. The accounting just reports what those activities have already produced.
For AP specifically, the connection is tight on the cost side. Timely AP posting means cost estimates at each reporting date are accurate — which means the percent complete is accurate — which means earned revenue is accurate — which means over/under is accurate. Delays in AP processing create a lag in job cost reporting, which creates artificial distortion in the WIP, which creates misleading over/under balances.
Over-billing and under-billing are not accounting quirks — they are the clearest financial indicator of how well the company is managing the cash flow of its projects. Moderate over-billing reflects good billing hygiene and front-loaded mobilization; significant under-billing reflects approval friction and financing the customer. Watching both at the portfolio level, understanding what drives the balance, and acting on the operational causes rather than the accounting results is the discipline that separates well-run construction companies from ones where the WIP just describes a mess after the fact.
Written by
Sarah Blake
Head of Product
Former AP Manager at a $200M construction firm, now leads product at Covinly. Writes about what AP teams actually need from automation — beyond the marketing promises.
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