What are overbilling and underbilling in construction?
Overbilling is the amount a contractor has billed on a contract beyond the revenue its progress has earned so far, and underbilling is the reverse: revenue earned by progress but not yet billed.
Also called billings in excess of costs, costs in excess of billings, over billing, under billing.
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Overbilling and underbilling in plain words
Both come from comparing, contract by contract, what progress says has been earned with what has been invoiced. A contract that is 50% complete and has billed 40% of its price is underbilled by 10% of the price. Underbilling is close to what Ind AS 115 calls a contract asset and overbilling to a contract liability, though how a balance is classified is for your auditor to confirm.
How is overbilling and underbilling calculated?
overbilling (underbilling if negative) = billed to date - revenue earned to date
Revenue earned to date is percent complete applied to the contract price. Work it out per contract; netted across a portfolio, one contract hides another.
Why does overbilling and underbilling matter?
Underbilling is work the contractor has paid for and cannot yet collect, which is cash held before the invoice. Overbilling brings cash in early, but it is owed back in work, and a contract that leans on it can run short later.
Where does overbilling and underbilling mislead?
Both figures rest on an estimate of percent complete, which on many sites is a judgement rather than a measurement. A large balance either way can mean a slow billing team, stuck certification or a wrong estimate, and the number alone does not say which. The overbilling and underbilling names are common in US contractor accounting; Ind AS 115 statements use contract asset and contract liability instead.
What do people get wrong about overbilling and underbilling?
- Netting the portfolio
- Overbilling on one contract offsets underbilling on another, so the total looks balanced while one project has not billed for months.