Overbilling and Underbilling: What Every Contractor Must Understand

What Is Overbilling? Overbilling (also called underrun) occurs when you bill the customer more than the value of work completed based on contract terms. You're billing ahead of actual work.

Example: Your progress billing shows $500,000 billed, but the value of work completed is only $450,000. You're overbilled by $50,000—or 10%.

What Is Underbilling? Underbilling (also called overrun) is the opposite—you've completed more work than you've billed. You're essentially financing the project for your customer.

Example: You've completed $600,000 of work but only billed $500,000. You're underbilled by $100,000.

Both are normal in construction. The key is understanding your position on each project and managing the cash flow implications.

Why It Matters: A project that's 50% complete with only 40% billed means you're financing 10% of the project with your own working capital. On a $1 million project, that's $100,000 of your money working for your customer.

When Overbilling Is Normal: Many contracts allow front-end loading where billing ramps up faster than work in early phases. Materials procurement and mobilization often bill ahead of installation. This is standard practice.

The Risk of Excessive Overbilling: Too much overbilling creates problems:

Retainage Concerns: Some contracts limit overbilling to reduce risk. Exceeding limits triggers retainage or payment issues.

Closeout Problems: If you're 90% complete but have billed 95%, the remaining 5% may not cover completion costs. You end up finishing with no billing runway.

Customer Relations: Customers notice when billing seems high relative to visible progress. This creates friction and potential disputes.

What to Monitor: Track billing position by job monthly. Investigate if overbilling exceeds 15-20% or drops suddenly (which may indicate estimating problems).

Managing Overbilling at Closeout: As projects near completion, billing naturally catches up. Plan for this—ensure you have sufficient remaining contract value to cover final costs.

Common Causes of Underbilling:

Front-Loaded Labor: In many construction schedules, labor is expended early (mobilization, rough-in) while billing for those phases comes later. This creates temporary underbilling.

Stored Materials: Materials delivered to the job but not yet installed often can't be billed. You're paying for materials before billing for them.

Change Orders: Work completed on change orders before formal approval creates underbilling. This is common and represents significant working capital exposure.

Subcontractor Invoicing: If subcontractors bill you monthly but you bill customers on a different cycle, timing differences create underbilling.

Optimistic Scheduling: Billing schedules in contracts are sometimes optimistic relative to actual work flow.

Managing Underbilling Impact:

Track by Job: Monitor underbilling position on each project. Monthly tracking reveals patterns.

Plan for Cash Impact: On large, long-duration projects, project underbilling and ensure you have working capital to cover.

Negotiate Billing Terms: Push for monthly billing tied to actual work, not contract schedule milestones.

Bill Stored Materials: Where contract allows, bill for stored materials to reduce underbilling.

Follow Up on Change Orders: Aggressively pursue change order approval to convert underbilling to billing.

Original Contract: The total contract value including approved change orders.

Estimated Total Cost: Your best estimate of total cost to complete.

Revenue Recognized: Revenue based on percentage complete (or other recognized method).

Costs Incurred: Actual costs to date.

Billing to Date: Amount billed to customer.

Over/Under: The difference between billing and revenue recognized.

Review WIP monthly to identify projects with significant underbilling that need attention. Look for trends: is overall company position improving or deteriorating?

Week 3-4: Train Project Managers. Ensure PMs understand billing position and can explain variances.

Monthly: Review WIP. Review WIP monthly, investigate significant underbilling, plan cash flow.

Ongoing: Refine Processes. Adjust billing schedules where possible, improve change order approval tracking.