Under billing happens when you’ve earned more revenue than you’ve billed, based on percent complete. On the balance sheet it’s a current asset, commonly labeled “costs and estimated earnings in excess of billings” (a contract asset under ASC 606). Formula: earned revenue minus billed to date. A positive result is under billing.
Why it matters
Under billing means you’ve financed the owner’s project with your own cash. Sometimes the reason is timing: work happened after the pay app cutoff. Often it’s worse: unapproved change order work that hasn’t been billed, a cost overrun inflating percent complete, or a missed billing. Sureties and lenders look hard at under billings because they’re the asset most likely to turn out not to be real.
Worked example
Illustrative: Riverside Medical Center, $49.3M contract, $43.68M estimated total cost, $31.7M cost to date. Percent complete is 72.6% and earned revenue is $35.78M. Suppose billed to date is $34.6M.
Under billing = $35.78M minus $34.6M = $1.18M.
If part of the cost to date is the $86,400 of fire damper work behind CO #14 and the CO isn’t approved yet, that piece can’t be billed until it is.
Common mistakes
- Assuming under billing will “catch up” next month without checking why it exists.
- Letting change order work sit unbilled for months while the paperwork waits.
- Ignoring that a cost overrun increases percent complete, which inflates earned revenue and under billing at the same time.
How os.construction handles it
We’re building billing, change orders and job cost on one record so under billing can be traced to its cause, such as a pending CO, the same day it appears.