In the construction industry, few documents are more closely scrutinized by lenders, sureties, and project owners than the work-in-progress (WIP) schedule, often referred to as the contract schedule. Yet among small and mid-sized contractors, the data in those schedules can be misunderstood or underutilized.
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One of the most telling indicators in any WIP report is the relationship between billings and earned revenue, commonly referred to as underbillings and overbillings. These figures offer critical insight into a job’s financial health, project management discipline, and a company’s short-term liquidity position. To unlock that insight, contractors should understand what these numbers actually mean, and what they may be signaling.
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Understanding the Basics
In a contract schedule, a project’s progress is typically measured using the cost-to-cost method (an input method), where the percentage complete is calculated as costs incurred to date divided by estimated total costs. That percentage is applied to the total contract value to determine revenue earned.
- If billings to date exceed revenue earned, the project is in an overbilling position.
- If revenue earned exceeds billings, the result is an underbilling position.
At first glance, overbillings might seem favorable, as they may indicate that more cash has been received in advance. Underbillings may appear problematic, suggesting that work has been performed but not yet billed. However, the real story behind these numbers is often more nuanced.
Overbillings: Helpful or Harmful?
Overbillings can support short-term cash flow needs. Contractors that are disciplined about billing upfront, especially for stored materials or mobilization, often avoid borrowing against a line of credit to finance ongoing work. In that context, overbillings are a sign of healthy billing practices.
However, persistent or growing overbillings can signal potential issues:
- Job fading: If overbillings are accompanied by declining gross margins, it could signal that the contractor is front-loading revenue while actual job performance is deteriorating.
- Deferred costs: Some contractors delay recognizing certain costs, such as pending change orders or subcontractor accruals, to temporarily preserve margins. Overbillings in this context may be hiding unrecorded liabilities.
- Contract liability: GAAP requires that overbillings be reported as a liability on the balance sheet, which reduces working capital and may impact bonding capacity or loan covenants.
In short, not all overbillings are created equal. Strategic billing is good business. Masking cost issues through overbillings is not.
Underbillings: A Red Flag, or Just Timing?
Underbillings are often more concerning from a financial health perspective. Fundamentally, they represent revenue that has been earned but not yet invoiced, effectively an interest-free loan the contractor is extending to the project owner.
Common causes of underbillings include:
- Delayed billing: The project team is behind in submitting monthly pay applications.
- Unapproved change orders: Work is performed but has not yet been formally approved, preventing billing.
- Cost overruns: The project is underperforming, and the revenue earned is higher than billings due to inaccurate or outdated cost estimates.
Of these, cost overruns are the most dangerous. They can lead to late-stage margin erosion or unexpected write-downs.
Underbillings also can create cash flow pressure. Since the contractor has already incurred the associated costs, failure to convert those earned revenues into billings quickly can strain working capital, especially for contractors working on multiple jobs with tight margins.
Why This Matters in 2025
In today’s market, where labor remains scarce, interest rates are elevated, and public bid competition is fierce, financial discipline is not optional. Sureties and banks are paying closer attention to WIP trends; not just the totals, but the patterns behind them.
A contractor showing significant overbillings across multiple jobs may raise questions about project execution and backlog quality. A contractor with consistent underbillings may appear overextended or signal weaknesses in cost and change order management.
Sureties may also look at underbillings as potential drains on cash and question whether they are collectible. Overbillings, if unexplained, may prompt concerns about whether project costs and revenues are being matched appropriately.
Turning Insight into Action
Contractors can turn WIP insight into a competitive advantage by adopting a few proactive practices:
- Review the contract schedule monthly – Don’t wait until year-end. Regular monitoring helps spot trends to take action early.
- Engage project managers – Help field teams understand how billing decisions and cost tracking affect job-level and company-wide financial health.
- Clarify your change order process – Track pending and approved changes separately and align revenue recognition with contract terms.
- Use your CPA as a strategic collaborator. Your auditor isn’t just there to test balances; they can help you interpret the story behind the numbers, support bonding conversations, and improve internal controls and reporting accuracy.
Final Thoughts
Underbillings and overbillings are more than accounting entries. They are key indicators, sometimes early warning signs, of job performance, billing efficiency, and cash flow risk. When monitored with discipline and interpreted correctly, they can become powerful tools for running a more resilient and profitable construction business.
In 2025, the strongest contractors won’t just build, they will read their contract schedules like blueprints, using them to steer the business with confidence and precision.
Citrin Cooperman’s Construction Industry Practice works closely with general contractors, heavy highway, electrical, and superstructure contractors, metal fabricators, and several other specialty trades. With years of experience in the industry, we understand the nature of our clients’ sales and project cycles. Evaluating project profitability, managing cash flows, and evaluating costs are all factors in determining our clients’ ability to maintain a competitive edge.
“Citrin Cooperman” is the brand name under which Citrin Cooperman Advisors LLC and Citrin Cooperman & Company, LLP, independently owned entities, provide professional services in an alternative practice structure in accordance with applicable professional standards.
Michael T. Crawley is a partner in Citrin Cooperman’s Providence, RI office with more than 22 years of experience providing attest services and CFO consulting services for privately-owned businesses, nonprofit organizations, and governmental entities. He directs all phases of the firm’s engagements in the construction, manufacturing and distribution, real estate, utilities, and restaurant and hospitality industries.
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