A contract liability is your obligation to deliver work you’ve already been paid for, or have billed (ASC 606-10-45-2). In construction, it’s usually the overbilling on the WIP schedule: billings to date exceed earned revenue. Customer advances and deferred service revenue are contract liabilities too.
Why it matters
Some overbilling is healthy cash management. Too much means the company is spending tomorrow’s cash today, and the balance sheet has to show it as a liability.
Worked example
A 300,000 contract billed 90,000 at the first milestone, with cost to date 20,000 of an estimated 250,000 (8%): earned 24,000, overbilled 66,000. The WIP entry posts Dr Contract Revenue 66,000 / Cr 2020 Contract Liability 66,000 (illustrative).
Common mistakes
- Front-loading the schedule of values and calling the overbilling profit.
- Netting overbillings against underbillings on other jobs.
How os.construction handles it
WIP posting is not built in the accounting preview yet, so overbillings are booked to the contract liability with manual journal entries. See Job cost and WIP.