The $60,000 in Your Account That Isn't Yours
You billed $180,000 on a $300,000 change-out. Costs to date are $96,000 against a $240,000 budget, so the job is 40% complete. You've earned $120,000. You've billed $180,000. The extra $60,000 is sitting in your operating account looking exactly like profit.
It isn't. That's construction overbilling underbilling in one line: the gap between what you've invoiced and what you've actually earned. Every contractor running draws or progress billing has that gap on every open job. The only question is whether you know the number.
How to Calculate Overbilling and Underbilling on a Job
Four inputs. That's it.
- Revised contract amount — base contract plus approved change orders.
- Costs to date — everything charged to the job: labor burden, material, subs, equipment, permits.
- Estimated cost to complete — what's left to spend, re-estimated this month, not the number in the original bid.
- Billed to date — all invoices issued, including retainage you haven't collected.
Percent complete is costs to date divided by total estimated cost (costs to date plus cost to complete). Multiply that by the revised contract to get earned revenue. Compare earned revenue to billed to date.
Bill more than you've earned, and you're overbilled — on the balance sheet that's billings in excess of costs and estimated earnings, a liability. Bill less, and you're underbilled — costs and estimated earnings in excess of billings, an asset.
Here's the underbilled side. Say a concrete sub has an $88,000 slab package with $12,000 in approved change orders, so the revised contract is $100,000. Costs to date are $60,000 and the super figures $20,000 left, so total estimated cost is $80,000 and the job is 75% complete. Earned revenue is $75,000. Billing to date is $56,000. That crew is underbilled $19,000 — nineteen grand of work already performed, already paid for in wages and ready-mix, and never invoiced.
Billing Ahead: Fine Until It Isn't
Front-loading a draw schedule is not fraud and I'm not going to pretend it is. Mobilization costs real money and most contracts let you bill for it. Deliberate overbilling early in a job is how small shops finance material buys without a line of credit.
The problem is that it's a loan from your own future revenue, and nobody sends you a payment coupon.
Imagine a roofer overbilled across four open jobs: $22,000, $16,000, $14,000 and $8,000. That's $60,000 of borrowed cash funding the fifth job's shingle order. Every one of those four jobs now has to be finished with costs and no billings left to cover them. If two of them run 8% over budget, the shop is paying for that overrun out of pocket while the bank balance drains for no reason anyone can name.
That's the profit-fade pattern. The books show a great spring and a brutal August, and the owner blames the market.
My rule: know your overbilled balance company-wide, every month, as one number. If it's larger than what you'd need to finish every open job, you are running on somebody else's money. Treat it like debt, because it is.
Billing Behind: The Expensive One
Underbilling is the mistake that actually costs cash, and small trade shops do it constantly. The usual causes:
- Change orders performed but never invoiced. The super said go, you went, nobody wrote the ticket.
- T&M work with unsigned tickets. No signature, no invoice, and by the time you chase it the foreman is on another site.
- A missed draw deadline. GC wants pay apps by the 25th; yours went in the 2nd; you just financed a month.
- Self-performed work coded to overhead instead of the job, so it never shows up as earned.
One distinction people get wrong: retainage is not underbilling. If the GC holds 10% on a $100,000 contract, you billed it — you just haven't collected it. Retainage belongs in receivables with an age on it. Lumping it into the WIP schedule as unbilled work double-counts your position and makes an underbilled job look healthy.
What Bankers and Bonding Agents Read First
Ask a surety underwriter what they open first and it isn't the income statement. It's the work-in-progress schedule, and the column they scan is the over/under.
Heavy underbilling reads as sloppy billing or unapproved change orders you'll never collect. Heavy overbilling reads as a contractor burning tomorrow's cash today. Either one shrinks your bonding capacity and can trip a working-capital covenant, because the overbilled balance sits in current liabilities and eats your ratio.
There's a tax consequence too. Under percentage-of-completion accounting, revenue follows the earned number, not the invoice. Overbilling doesn't defer income and underbilling doesn't hide it. Contractors who assume "I didn't bill it, so it isn't income" find that out in March.
Run the Numbers Every Month, Not Every Spring
The weak link is always the cost-to-complete estimate. Costs to date come from the books; total estimated cost comes from a human. If your percent complete is still built on the original bid, you're computing the gap against a number that stopped being true the day the schedule slipped.
I'd rather have the PM spend twenty minutes re-forecasting remaining cost on each open job than have a perfectly reconciled bank account and a stale budget. One is an opinion that gets better with practice. The other is arithmetic on a fiction.
Make it a monthly ritual: close the books, update cost-to-complete on every open job, produce the WIP schedule, and read the over/under column out loud. Jobs that swing from overbilled to underbilled between two months are telling you either the estimate moved or costs escaped a cost code. Both are worth an hour to find. That whole rhythm is what monthly bookkeeping is supposed to deliver for a contractor — a close that ends with a WIP schedule, not just a reconciled checkbook.
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