Over-Billings and Under-Billings: How to Read the WIP Schedule Like a CFO

The WIP schedule — Work in Progress — is a construction contractor's core management report. It lists every active project with its contract value, estimated cost, costs to date, percentage complete, revenue earned to date, billings to date, and the difference between earned and billed. That difference is the over-billing or under-billing position.

For a CFO, the WIP is read both project by project and in aggregate. Project-by-project tells you which jobs are tracking well and which aren't. Aggregate tells you whether the company overall is billing ahead of its earned work (creating cash but building a liability) or billing behind it (accumulating unbilled receivables and straining cash). Neither extreme is ideal, and the pattern matters.

The Core Calculation

For each project on the WIP, the key formula chain is:

If a project has $425K of costs against $850K estimated total cost, it's 50% complete. With $1M contract revenue, earned revenue is $500K. If the contractor has billed $550K to date, the over-billing is $50K. If they've billed $450K, the under-billing is $50K.

Over-billing appears on the balance sheet as "Billings in Excess of Costs and Earnings on Uncompleted Contracts" — a liability. It represents work the contractor has been paid for but hasn't earned yet. Under-billing appears as "Costs and Earnings in Excess of Billings on Uncompleted Contracts" — an asset, representing work earned but not yet billed.

What Over-Billings Signal

An individual over-billed project means the contractor has been paid for more work than they've actually performed. This can happen in several ways, with different implications:

Some amount of over-billing is normal and healthy — it funds the contractor's cash flow during active work. But over-billings beyond normal levels are a warning sign: the contractor is effectively carrying a debt to the owner for work not yet done. If the project goes bad and the contractor can't complete, the owner has already paid for the unearned portion and will have to go after the contractor (or the surety) to recover.

What Under-Billings Signal

An individual under-billed project means the contractor has performed work they haven't been paid for yet. The contractor is carrying the cost of that work on their own balance sheet — in essence, financing the project for the owner. Common causes:

Under-billings beyond normal levels signal cash flow strain. The contractor is funding work the owner will eventually pay for, but not yet. Large under-billings relative to company size can indicate either administrative problems (slow pay apps), pricing problems (pending change orders not getting approved), or estimating problems (cost overruns that haven't been surfaced as profit fade).

The Portfolio View

Aggregating across all active projects, the portfolio totals tell the story of the contractor's overall position:

The Profit Fade / Profit Improve Signal

Comparing this period's WIP to last period's is where trends emerge. For each project, the estimated profit at this period vs. last period tells you whether the job is fading (profit going down) or improving (profit going up).

Profit fade — estimated profit declining over time — is a yellow flag. The contractor's total estimated cost has been revised up. Common causes: cost overruns that have emerged (labor productivity, material price increases, scope surprises), owner non-acceptance of change orders the contractor had assumed would be approved, rework from quality issues.

Profit improvement — estimated profit increasing — is rarer and deserves scrutiny. Sometimes it's real (efficiency gains, favorable change orders). Sometimes it's the estimator revising estimates artificially low to avoid showing bad news. Auditors look for this specifically because it can be a form of earnings management.

Reading Specific Project Red Flags

Certain WIP patterns on specific projects warrant immediate attention:

WIP and Bonding Capacity

Sureties read WIP schedules closely. Over-billings reduce bonding capacity because they represent a liability for work not yet earned. Under-billings reduce bonding capacity because they represent cash that hasn't come in yet. A contractor with large absolute over- and under-billings — even if net-zero — looks financially stretched to an underwriter.

For contractors actively growing bonding capacity, tight WIP discipline (small swings, consistent pay application timing, clean estimate-to-complete refreshes) is one of the strongest signals to a surety. The WIP tells the surety more about project management discipline than almost any other document.

Month-End Close Tie-Out

The WIP should tie to the G/L at each month-end. The sum of over-billings across all projects should equal the G/L's "billings in excess" account. The sum of under-billings should equal the "costs in excess" account. When these tie, the WIP is being maintained consistently with the G/L. When they don't, something is inconsistent — either the WIP hasn't been updated with all month-end adjustments, or the G/L entries aren't reflecting the WIP.

The monthly tie-out is the CFO's check that the WIP is actually reliable. A WIP that doesn't tie to the G/L isn't a trustworthy report; it's an informal estimate.

Bottom Line

The WIP schedule is the central report for construction CFOs. Over-billings and under-billings tell the story of how each project's billing position relates to its earned position, and the aggregate tells the story of overall cash flow and balance sheet health. Reading WIP well — project by project and in portfolio view — is the difference between catching problems early and discovering them at final audit. Tight WIP discipline is also one of the strongest signals to sureties, lenders, and boards that a contractor is well-managed.