Over Under Billing (WIP)
I get a lot of calls on this topic. Some clients compile this information every month; others wait for mid-year bank financials or yearend tax preparation.
Overall, the idea of these reports is to review the progress of the job and confirm you’re on track to meet your profit goals. From the accounting standpoint, it’s a way to smooth out the ‘timing’ problems with costs and billing.
When a progress bill is put together, the PM’s are often projecting how far they’ll be by the end of the month. This includes what size crews they’re scheduling; what materials will be on the site and/or ‘in the wall’; what subcontractors are expected and when they say they’ll start or finish their work. Sometimes this estimate is done 5, 10, or even 15 days before the end of the month.
Then reality steps in— the crew didn’t make the production rate; the materials weren’t delivered on time; the subcontractor didn’t get as far as they expected; the weather was uncooperative; or maybe you blew past all the estimates and got way further than expected!
The Over/Under billing review compares what expenses actually hit in the month compared to the budgeted expenses for the project (including approved change orders). What percent of the budget has been used? Strictly doing the math, that would indicate what percent of the contract you would have earned. When you compare that to the actual billing to-date, you are either Under Billed (got more done than you estimated or were allowed to bill), or Over Billed (didn’t get as far as you expected). You’ll want the PM’s to weigh in here; the job may be under or over budget, and that needs to be considered. Bring the results to the PM for input.
Being Over Billed is not bad, BTW. In fact, it helps your cash flow. Being Under Billed is not bad, but can adversely impact cash if it keeps happening. – CMW