What is Overbilling?
Overbilling is when a contractor invoices for labor contracted and supplies before the work is completed. For instance, a company meets 20% of the work in the billing cycle but invoices their customer for 30 percent. This additional 10% is called the amount overbilled.
The Positive Side of Overbilling
Some overbilling is an excellent thing, especially in the construction industry, known for its slow payment. By overbilling, a contractor will strive to remain ahead of the project’s cash flow, thereby helping offset the negative effect on cash flow resulting from an unpaid customer. While exact numbers are challenging, many contractors are willing to try overbilling on their projects if feasible, mainly if they’re dealing with a client who isn’t paying on time.
The Risks of Overbilling
Contractors should be aware, however, since an overbilling issue could be a problem and could cause a situation referred to as “job borrow” (also known as “running out of billing”). A company may encounter an “in-demand” situation when, in the process of a project that has there is a long time frame being negotiated, the business has advanced so much on its progress bills that the anticipated costs for cash to complete the project are more significant than the amount for the project that is yet to be charged.
Here’s an example to demonstrate the concept of job-borrowing idea:
- ACME Company has a $100,000 construction contract
- ACME will send one more progress invoice to send out for $20,000. If their client pays the final $20,000, they can pay the total contract amount of $100,000.
- In reality, ACME has $30,000 of cash costs remaining to complete the project. With only $20k more in the pipeline, the company cannot make cash flows for the rest of the project to $10,000.
Conclusion
Overbilling is a concern only if a contractor needs to know that they’ve billed too much for a project. The contractor is astonished after the project. They are forced to endure an unsustainable cash flow to complete the project. In the above example, ACME would be fine if the $10,000 they overbilled their client throughout the project remained at the banks. However, should ACME mistakenly think that the additional $10,000 was just a profit or a free cash flow and use it for something else, they’ll need to figure out how to get the $10,000 to complete the task.
The top construction companies typically have strong accounting and financial teams that can keep track of the project’s costs and progress as well as the flow of cash regularly in addition to not only at the close of the month or construction project once it’s “time to close out the books.” Controlled overbilling is a valuable tool of a construction firm’s financial toolbox to mitigate the industry’s notoriously slow payment practices’ effect on the cash flow. It is crucial to be sure that you track the exact location of the project’s costs, advancement, and billings.
What Is a Schedule of Values?
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Categories
- Construction Accounting
- Pay Applications
Share: Construction Accounting
ACCOUNTING BASICS
- Intro to Construction Accounting
- Key Accounting Reports for Construction
- Recognizing income
- Chart of Accounts
- General ledger
ACCOUNTING METHODS
- Amount basis vs. cash accounting
- The percentage that HTML0 has been completed
- Method of completing contracts
- Work in Progress
TRACKING COSTS
- Job Costing
- Mobilization Costs
- Cost of Goods Sold
AR & AP
- Best methods for billing
- Overbilling
- Underbilling
- Eight ways you can increase the quality of accounts receivable
- Tips to improve your accounts payable
ACCOUNTING SOFTWARE & TECHNOLOGY
- Software for accounting
- Quickbooks tips for contractors
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