Overbilling vs Underbilling in Construction | Gurian CPA

Overbilling occurs when a contractor bills a customer more than the revenue actually earned on a project to date. On the balance sheet, this appears as billings in excess of costs and estimated earnings, a contract liability. Underbilling occurs when revenue has been earned but not yet billed to the customer. That appears as costs and estimated earnings in excess of billings, a contract asset. Both are normal in progress-based construction billing, but chronic patterns in either direction signal problems that surety companies, lenders, and sophisticated owners look at carefully.

For construction businesses using percentage-of-completion accounting, the way these two figures roll up on the WIP schedule tells a real story about billing discipline, cash flow position, and the accuracy of project cost estimates — the core inputs behind any reliable construction billing analysis. This guide is part of our broader job costing and project accounting coverage for contractors. It explains what each term means, how it appears on the balance sheet, works through an example using the same project both ways, and explains why sureties treat these figures as a health indicator.

What Is Overbilling and Underbilling in Construction?

Under percentage-of-completion accounting, a contractor recognizes revenue in proportion to the amount of a project's estimated cost that has been incurred to date. The formula is straightforward:

Earned revenue = (Costs incurred to date / Total estimated costs) × Contract price

Once you know the earned revenue figure, you compare it to what the customer has actually been billed:

• If billings to date > earned revenue, the project is overbilled — the contractor has invoiced ahead of the work performed.
• If billings to date < earned revenue, the project is underbilled — the contractor has performed work not yet invoiced.

An overbilling position is a contract liability: the contractor still owes that value in future work. An underbilling position is a contract asset: it represents future receipts for work already performed.

Neither position is inherently good or bad on a single project. Front-loaded billing schedules produce overbilling in the early stages of a job. Retained funds held back by the customer produce underbilling at the tail end. What matters is the pattern across the portfolio and the trajectory of any single job. This is core construction accounting territory, and it does not translate cleanly from standard business accounting frameworks.

How Overbilling and Underbilling Appear on the Balance Sheet

Both figures live on the balance sheet under construction-industry-specific line items that show up nowhere else in the general chart of accounts.

These line item names predate ASC 606 — they come from the older percentage-of-completion guidance under ASC 605-35. ASC 606 introduced newer terminology instead: "contract asset" and "contract liability." Many private construction companies still use the legacy captions on their financial statements, sometimes alongside the ASC 606 terms and sometimes in place of them. (For more on how ASC 606 reshaped these classifications, see CFMA's guide to contract asset and liability presentation.)

The important accounting concept is that these figures are not revenue or receivables. They are timing accounts that reconcile what has been billed against what has been earned. A contractor with $500,000 in overbillings does not have $500,000 in obligations to refund. They have $500,000 worth of work still owed to customers who have paid or been invoiced in advance.

A Worked Example: The Same Project as Overbilled and Underbilled

Consider a $1,000,000 contract with total estimated costs of $800,000. At the reporting date, the contractor has incurred $400,000 in project costs, which is 50% of the estimated total costs.

Earned revenue calculation: ($400,000 / $800,000) × $1,000,000 = $500,000 earned to date.

Now look at the same project under two different billing scenarios.

Scenario A: The Project Is Overbilled

The contractor has billed the customer $600,000 on a front-loaded billing schedule.

• Billings to date: $600,000
• Earned revenue to date: $500,000

• Overbilling: $600,000 - $500,000 = $100,000 in billings in excess of costs and estimated earnings

Balance sheet impact: $100,000 shows up as a contract liability. The contractor received cash (or an invoice equivalent) ahead of the work. Over the remaining life of the project, that $100,000 will unwind as the remaining work is performed. During that unwinding, the contractor must cover ongoing project costs from other sources of cash since new billings will lag behind new work.

Scenario B: The Project Is Underbilled

Same project, same $500,000 earned to date, but the contractor has only billed $400,000. Perhaps a change order is pending approval, or retainage is being held back, or the billing schedule is back-loaded.

• Billings to date: $400,000
• Earned revenue to date: $500,000

• Underbilling: $500,000 - $400,000 = $100,000 in costs and estimated earnings in excess of billings

Balance sheet impact: $100,000 shows up as a contract asset. The contractor has performed work that has not been invoiced. Cash is being used to fund the work while the receivable is still on the wrong side of the billing cycle. Working capital is tighter than the profit-and-loss statement alone would suggest.

The Cash Flow Warning Hidden in Chronic Overbilling

A contractor whose portfolio consistently shows large overbilling balances can look strong on paper: cash is high, billings are ahead of costs, and short-term liquidity appears healthy. What that pattern often masks is that the business is being financed by its customers rather than by earned profit.

When a big overbilled job winds down, the billing pace slows sharply while costs continue at full speed. If new work does not replace the overbilling at a similar rate, cash pressure builds quickly. This is a common trap for growing contractors and one of the reasons a healthy WIP schedule matters more than a single-point cash balance.

Why Surety Companies Care About Overbilling and Underbilling

Bonding capacity depends on the surety company's confidence that the contractor can complete work in progress and take on additional work without financial distress. Sureties don't just look at profitability — they look at three things on the WIP schedule:

• Gross overbilling exposure: Large aggregate overbillings mean the contractor owes significant future work relative to cash already received — and if cost overruns hit, that cash may already be spent elsewhere.
• Gross underbilling exposure: Large aggregate underbillings mean the contractor is carrying customer credit at scale, tying up working capital that isn't available for new projects.
• Trend direction over time: A single high-overbilling quarter isn't usually alarming. A steady multi-quarter climb without matching backlog growth is alarming — it signals the billing schedule and cost incurrence are drifting apart.

Sureties also examine whether the estimated total costs on open jobs are being adjusted honestly. A contractor who leaves estimated costs artificially low inflates the percent-complete calculation. That overstates earned revenue and masks true overbilling — the WIP schedule can look on-plan when the contractor is actually overbilled. This is why surety underwriters ask for job cost details, cost-to-complete estimates, and gross profit fade analysis in addition to the summary WIP schedule.

For contractors seeking or maintaining bonding, cleaning up the WIP schedule and documenting cost estimates carefully — well before the annual surety review — pays off. A construction CPA who has been through many surety reviews can identify the specific line items an underwriter will focus on before the reviewer does.

Frequently Asked Questions

Is overbilling always a problem?

No. Overbilling is normal in the early phase of most construction projects because billing schedules are often front-loaded to help contractors fund mobilization, materials, and early-stage labor. The issue is not the presence of overbilling but the pattern.

Overbilling that consistently exceeds normal industry ranges for the type of work, that grows quarter over quarter without a matching increase in project volume, or that is concentrated in a small number of jobs, is worth investigating. Overbilling that unwinds cleanly as jobs progress is a healthy sign of active billing discipline.

How do you calculate overbilling on a construction project?

Overbilling is the difference between billings to date and earned revenue to date on a specific project. The formula is:

Overbilling = Billings to date - (Costs incurred to date / Total estimated costs) × Contract price

If the result is positive, the project is overbilled. If it is negative, the project is underbilled. The calculation is done per project and then summed across all open jobs to produce the portfolio-level overbilling and underbilling balances that appear on the balance sheet.

For the calculation to be accurate, the total estimated cost must reflect a current, honest estimate. Contractors who leave estimated costs at their original bid figures long after cost overruns have occurred will systematically misstate their overbilling and underbilling positions.

What accounting method does this framework apply to?

The overbilling and underbilling framework described here applies to contractors using percentage-of-completion accounting under ASC 606. Contractors using completed-contract accounting recognize revenue only when a project is finished, so the timing differences between billings and earned revenue do not accumulate on the balance sheet in the same way. Most construction companies of meaningful size use percentage-of-completion because it produces more accurate period-over-period financials.

How often should the WIP schedule be updated?

Monthly, at a minimum. WIP schedules updated only quarterly or annually miss the operational signals that overbilling and underbilling patterns are meant to surface. Contractors making decisions in real time (bidding new work, extending credit to subcontractors, drawing on lines of credit) need current numbers, not stale ones.

Key Takeaways

• Overbilling and underbilling are timing differences between what's been billed and what's been earned — not extra profit, and not money owed back.
• The same $100,000 gap looks completely different depending on direction — overbilling defers a future cash crunch, while underbilling creates one right now.
• Sureties aren't just checking whether a job is overbilled or underbilled — they're checking whether the cost estimates behind that number are honest and current.

If your WIP schedule is not producing figures you can defend, or if you are preparing for a surety review and want a second set of eyes on the financials, schedule a call with our team, and we'll follow up within 24 hours.

Getting the WIP Schedule Right

The overbilling and underbilling figures on your balance sheet are only as accurate as the cost estimates, billing records, and cost-to-date entries feeding them. For contractors who want their financials to hold up to surety review, bank review, and internal decision-making, the discipline behind the WIP schedule matters as much as the schedule itself.

Gurian CPA's team has spent 22+ years working with construction contractors across the Dallas metro and the Houston construction accounting market, from residential builders to commercial general contractors to specialty subs.