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How over and under billing is calculated
This calculator uses the cost-to-cost method, the most common way to measure progress on a construction contract under percentage-of-completion accounting.
- Percent complete = cost to date / estimated total cost.
- Earned revenue = percent complete x contract amount.
- Over or under billing = billings to date - earned revenue.
- Estimated gross profit = contract amount - estimated total cost.
Reading the result
If you have billed more than you have earned, the job is overbilled. On the balance sheet that is a liability, billings in excess of costs and estimated earnings: you owe the owner work. A modest overbilling is healthy cash management. A large one on a job that is behind can hide a problem.
If you have billed less than you have earned, the job is underbilled. That is an asset, costs and estimated earnings in excess of billings. It can mean slow billing, unapproved change orders, or costs running past the estimate. Sureties and lenders look hard at underbillings.
The result is only as good as the estimated total cost. If that number is the original budget and the job has moved, every figure here is wrong. Use your current estimate at completion: cost to date plus what it will really take to finish.
When the estimate exceeds the contract
If estimated total cost is higher than the contract amount, the job is projected to lose money. Accounting standards require the whole projected loss to be recognized as soon as it is evident, not spread over the rest of the job.
Frequently asked questions
What does overbilled mean in construction?
Overbilled means billings to date are higher than the revenue earned to date, measured by percent complete. It is recorded as a liability called billings in excess of costs and estimated earnings.
What does underbilled mean in construction?
Underbilled means the revenue earned to date is higher than the amount billed. It is recorded as an asset called costs and estimated earnings in excess of billings.
Is being overbilled good or bad?
A small overbilling is generally good: you are being paid slightly ahead of the work. A large overbilling means cash has been collected for work still to be done and paid for, which becomes a problem if that cash has already been spent.
Should retainage be included in billings to date?
Yes. Billings to date on a WIP schedule are gross billings, including amounts held as retainage.