In the complex world of construction projects, contractors face numerous financial challenges. Among them are the issues of over and under billings, which can have a significant impact on a company’s balance sheet and overall financial health.
In this blog, we will delve into the concepts of over and under billings, their implications, and best billing practices for construction companies.
Over and Under Billings Explained
Being over billed and under billed are terms commonly used in construction. They describe the difference between the amount billed by a contractor and the amount recognized as revenue. These differences arise due to various factors such as unapproved change orders, job borrowing situations, and slow billing practices.
Unapproved Change Orders
Construction projects often involve changes or modifications requested by clients during the work. However, if these change orders are not properly documented and approved, they can lead to over or under billings. Unapproved change orders may result in under billings, as the contractor has not invoiced the client for the additional work performed.
In certain cases, contractors may need to borrow resources, such as equipment or personnel, from one project to another. This can create complications in terms of billing, as the costs and revenue associated with the borrowed resources must be properly allocated. Failure to track accurately and bill for these resources can result in over or under billings.
Slow Billing Practices
Slow billing is a common issue in the construction industry, where invoices are not submitted promptly or accurately. This can lead to under billings, as the revenue recognized may not reflect the work completed. Slow billing practices can disrupt cash flow, delay project completion, and impact a contractor’s ability to meet financial obligations.
Implications for Contractors
Over and under billings have significant implications for contractors, particularly in terms of financial reporting and project cost management. Contractors must carefully monitor and track these billing discrepancies to ensure accurate financial statements, maintain work-in-progress (WIP) balances, and correctly report liabilities on the balance sheet.
Billing Practices for Contractors
To mitigate the challenges associated with over and under billings, construction companies should adopt best billing practices. Here are a few key recommendations:
Integrated Financial Reporting: Accurate financial reporting is essential for managing over and under billings. Construction accounting software, like Sage Intacct Construction, offers integrated reporting capabilities that consolidate project data and provide comprehensive financial statements. By generating reports that clearly present the billing status, estimated costs to complete, and earned revenue, contractors can gain a better understanding of their financial position and make informed decisions.
Accurate and Timely Documentation: Proper documentation of all change orders, work completed, and resources borrowed is crucial. Maintaining clear and organized records helps ensure accurate billing and avoids under/over billings.
Percentage of Completion (POC) Method: Contractors can utilize the POC method to recognize revenue based on the percentage of work completed. This method provides a more accurate representation of the project’s financial status and minimizes the risk of significant over or under billings.
Regular Communication with Project Managers: Project managers play a vital role in monitoring project costs and progress. Close collaboration between accounting and project management teams enables accurate tracking of costs, billing milestones, and work completion, reducing the likelihood of billing discrepancies.
Financial Statement Analysis: Contractors should regularly analyze financial statements, including the balance sheet, to identify any significant over or under billings. These analyses help determine the estimated costs to complete projects and adjust billing practices accordingly.
Embrace Technology for Smoother Billing Processes and Financial Success
By implementing effective billing practices, such as accurate reporting and documentation, utilizing the POC method, and fostering strong communication between project managers and accounting teams, construction companies can mitigate the risks associated with over and under billings.
The construction industry is highly competitive, and contractors must strive for efficiency and accuracy in their billing processes. Staying updated with the latest advancements in construction accounting software can streamline billing processes and enhance accuracy. Technology solutions designed for the construction industry offer features like automated invoicing, project cost tracking, and real-time reporting. These features can significantly improve billing efficiency and reduce mistakes.
Ready to streamline your billing processes?
Take your accounting to the next level with Sage Intacct Construction.