Over and under billings

Definition

Billing ahead of the work done, or behind it, on a contractor's open jobs.

Why It Matters

A contractor earns a job's revenue in step with the share of its estimated cost already spent. Billing more than that share is overbilling: cash collected for work still owed, which is a liability. Billing less is underbilling: work done and not yet invoiced, an asset only as good as the estimate behind it. The schedule of open jobs shows both, job by job. Heavy overbilling means the seller has spent cash the buyer must earn back by finishing the work, so it belongs in the working-capital peg. Chronic underbilling often hides cost overruns nobody has admitted. Ask for the schedule at three dates and watch which way each job moves.

In numbers: A $1,000,000 contract with $600,000 of its $750,000 estimated cost spent is 80% complete and has earned $800,000; billed $900,000, it carries $100,000 of overbilling the buyer finishes with no new cash.