Quick answer: Costs in excess of billings is a contract asset. Billings in excess of costs is a contract liability. Under ASC 606 the two are netted per contract, not per job line and not across the company, and conditional retainage now belongs inside that netted position rather than in accounts receivable.

Two lines, one calculation

Every open contract produces the same comparison each month. Take the revenue you have earned by progress toward completion, and compare it to what you have actually billed.

Earned more than you billed — the difference is a contract asset. Traditionally captioned costs and estimated earnings in excess of billings, and commonly called underbilling.
Billed more than you earned — the difference is a contract liability. Traditionally captioned billings in excess of costs and estimated earnings, and commonly called overbilling.

ASC 606-10-45-1 states the rule: when either party has performed, the contract is presented as a contract asset or a contract liability depending on the relationship between the entity’s performance and the customer’s payment, and any unconditional right to consideration is presented separately as a receivable. Subsections 45-2 through 45-5 fill in the definitions.

The netting rule contractors get wrong most often

The position is determined at the individual contract level. One contract is either a contract asset or a contract liability. It is never both, and you do not net across contracts to arrive at a single company-wide figure.

That distinction matters more than it sounds. A contractor with four jobs underbilled by $300,000 and three jobs overbilled by $280,000 reports a $300,000 contract asset and a $280,000 contract liability — two separate lines on the balance sheet, gross. Reporting a single net $20,000 figure understates both sides and hides exactly the information a surety is looking for.

Your surety reads these two lines before almost anything else

Together with the WIP schedule they show whether a contractor is financing itself on customer money. Netted into one figure, or with retainage parked in receivables out of habit, they tell a flattering story that does not survive underwriting. Presented correctly they can support more capacity, not less.

We prepare and defend this presentation for contractors. Call 631-349-1661 or send us the details and we will give you a straight answer.

Retainage: the classification that reversed

Before ASC 606, retainage generally sat in accounts receivable. That is no longer the default answer, and this is the single most common presentation error we see on contractor balance sheets.

A FASB staff educational paper on presentation of retainage for construction contractors, issued 1 April 2025, sets the test plainly: classification depends on whether the entity’s right to payment is unconditional.

Conditional retainage — contingent on completing future work, hitting a milestone, or satisfying a performance requirement. This describes most long-term construction retainage. It is included in the contract asset or contract liability, netted at the individual contract level.
Unconditional retainage — where nothing but the passage of time stands between you and payment. Only then does it become a receivable.

ASC 910-10-50-7 requires disclosure, for retainage included in receivables, of the amounts, the portion expected to be collected after one year, and where practicable the years of expected collection. And if retainage is concluded to be unconditional, it is worth considering whether the payment terms create a significant financing component under ASC 606-10-32-15 through 32-20.

The practical consequence lands at renewal. Netting conditional retainage into the contract position changes what your working capital looks like to a surety, which is the number that drives bonding capacity. FASB has blessed voluntary presentation enhancements — a parenthetical on the face of the balance sheet, a subtotal, or note disaggregation — none of which may break the contract-by-contract netting. If retainage is material to you, that is a decision to make deliberately rather than inherit.

A note on the old captions

Costs and estimated earnings in excess of billings, and its mirror, came from ASC 605-35-25 Alternative B, which ASC 606 eliminated. The arithmetic is not identical: ASC 606 computes revenue as transaction price multiplied by measure of progress, not costs plus estimated earnings, and conditional retainage is inside the 606 figure where it was generally outside the legacy one.

The CFMA now recommends companies stop using the legacy captions. In practice most contractors, banks and sureties still speak in them, so you will see both. What matters is that whoever prepares the schedule knows the two are not the same computation.

Are these lines always current?

Usually, because most construction contracts run inside a normal operating cycle. But a contract asset that will not convert to cash within the operating cycle — a long-duration job, or retainage on a project with a distant release milestone — may warrant non-current presentation. Defaulting everything to current because it is simpler is how a balance sheet ends up overstating short-term liquidity to the one reader who is specifically testing it.

Frequently asked questions

Are costs in excess of billings an asset?

Yes. It represents revenue you have earned but not yet billed, so it is a contract asset under ASC 606. It is not a receivable, because your right to the money is still conditional on performing more work rather than merely on time passing.

Is billings in excess of costs the same as deferred revenue?

Conceptually close, but the correct ASC 606 term is a contract liability, and it is measured and netted contract by contract including conditional retainage. Deferred revenue is a broader label that does not carry those mechanics.

Where does retainage go on a contractor balance sheet?

If the right to payment is conditional on future performance, inside the contract asset or contract liability for that contract. If it is unconditional and only time remains, in receivables, with the ASC 910-10-50-7 disclosures.

Can one contract show both a contract asset and a contract liability?

No. The position is netted at the individual contract level, so each contract lands on one side or the other. Gross presentation is across contracts, not within one.

Why this is worth getting right

These two lines are among the first things a surety underwriter and a construction lender look at, because together with the WIP schedule they show whether a contractor is financing itself on customer money. Presented correctly they tell an accurate story. Presented as a single netted number, or with retainage parked in receivables out of habit, they tell a flattering one that does not survive scrutiny.

This is general information rather than advice on your specific financial statements. The underlying calculation is covered in our guide to overbilling, underbilling and billings in excess of costs, the monthly schedule that produces it in our guide to the construction WIP schedule, and the billing document behind it in our explanation of AIA G702 and G703 pay applications. If you would like the presentation reviewed before a surety does, that is part of our construction accounting services.

Underbilled jobs are the line underwriters have been reading hardest, because work performed and not invoiced ties up working capital the surety was counting on. See how this reads on a bonding review.

A contract asset is only as reliable as the job-cost detail underneath it. If costs are landing in overhead instead of on the project, the figure is already wrong before the schedule is prepared — which is why contractor bookkeeping and cleanup belongs before the WIP schedule, not after it.

Talk to an accountant who works in your industry

Precision Accounting & Consulting works with contractors, law firms, medical practices and property owners across the country. If something on this page raised a question about your own books, send it over and we will give you a straight answer.