Quick answer: Overbilling means you have invoiced a job for more than you have earned so far (billings in excess of costs). Underbilling means you have earned more than you have invoiced (costs in excess of billings). Both live on your work-in-progress (WIP) schedule, and both quietly distort profit and cash flow when contractors do not track them every month.
What overbilling and underbilling actually mean
Long-term construction contracts are usually reported on the percentage-of-completion method. Instead of recognizing revenue when you send an invoice, you recognize it as you incur cost. The most common formula is cost-to-cost: costs incurred to date divided by total estimated costs equals your percent complete. Multiply that percentage by the contract price and you get your earned revenue.
Earned revenue almost never matches what you have billed. Your billing schedule is driven by the contract, the owner, and your cash needs; your earned revenue is driven by the work actually put in place. The gap between the two is exactly what overbilling and underbilling measure.
Billings in excess of costs (overbilling)
When cumulative billings exceed earned revenue, you are overbilled. On the balance sheet this shows up as billings in excess of costs and estimated earnings — a liability, not income. You are holding the owner’s money for work you have not yet performed. Front-loaded or mobilization billing is a legitimate way to fund a job, but a large overbilling balance means future revenue has already been collected, so later periods will look cash-starved even on a profitable job.
Costs in excess of billings (underbilling)
When earned revenue exceeds cumulative billings, you are underbilled. This shows up as costs and estimated earnings in excess of billings — an asset, much like an unbilled receivable. Underbilling usually means you are financing the owner’s project with your own cash. It also frequently signals unapproved or unpriced change orders, missed billings, or estimating that understates cost. Chronic underbilling is one of the clearest early warnings of a cash-flow squeeze.
A worked example
Say you hold a $1,000,000 contract with $800,000 in estimated costs. To date you have incurred $400,000 in job cost.
- Percent complete: $400,000 ÷ $800,000 = 50%
- Earned revenue: 50% × $1,000,000 = $500,000
If you have billed the owner $600,000, you are overbilled by $100,000 — a liability. If you have billed only $420,000, you are underbilled by $80,000 — an asset. Same job, same cost, very different balance sheet and cash picture depending on how you billed.
Why the over/under position matters more than most contractors think
Over- and under-billing is not an accounting footnote — it drives three decisions that affect whether your company survives a downturn.
- Cash flow. Heavy overbilling can make a company look flush while it is really spending money it has not yet earned. When the overbilling burns off, cash dries up. Sureties call this “borrowing from the job.”
- Bonding capacity. Sureties read the WIP schedule before they read the income statement. Large underbillings and swings in gross profit make underwriters nervous and can cap your bonding line right when you need it.
- True profitability. Without an over/under adjustment, a job’s profit looks like billings minus costs, which is meaningless mid-project. The WIP schedule restates revenue to what you actually earned so you see real margin by job.
Common billing mistakes that distort the WIP
- Treating deposits and mobilization billings as revenue instead of overbillings.
- Letting estimated total cost go stale, which throws off percent complete and every downstream number.
- Performing change-order work before it is priced, then never billing it — a classic underbilling trap.
- Booking material bought but not yet installed as “cost incurred,” overstating percent complete.
- Reviewing the WIP only at year end instead of monthly, so problems surface too late to fix.
How to keep billings and earned revenue aligned
- Build a WIP schedule every month, not just at year end, and review it with your PM and accountant together.
- Update total estimated cost each period so percent complete reflects reality, including approved change orders.
- Bill to at least your earned revenue when the contract allows, so you stop financing the owner.
- Track change orders as a distinct line and bill approved ones promptly; log unapproved ones so they are not forgotten.
- Exclude uninstalled materials from cost-to-cost percent complete, or adjust for them, to avoid overstating progress.
If your WIP schedule and your billings do not agree, that is worth a conversation
The arithmetic here is simple. The judgment is not. Everything depends on your estimated cost at completion, and that single number decides whether a job reports profit or loss this month. Get it wrong and a profitable job looks like it is bleeding, or worse, a bleeding job looks fine until the last two months.
This is the reconciliation we do every month for contractors, and it is usually where the surprises live. Call 631-349-1661 or send us the details and we will give you a straight answer.
Frequently asked questions
Is overbilling bad?
Not by itself. Modest, planned overbilling helps fund a job and is normal. The danger is a large or growing overbilling balance across many jobs, because it means you have already collected future revenue and later periods will run short of cash.
Are costs in excess of billings an asset?
Underbilling — costs and estimated earnings in excess of billings — is an asset. It represents revenue you have earned but not yet invoiced, similar to an unbilled receivable.
How do I calculate billings in excess of costs?
Compute earned revenue (percent complete times contract price). If cumulative billings are greater than earned revenue, the difference is billings in excess of costs (overbilling). If billings are less, the difference is costs in excess of billings (underbilling).
What does overbilling mean?
Overbilling means you have invoiced a customer for more contract value than you have actually earned by progress on the job. It is normal and often deliberate, but the excess is a liability on the balance sheet, not profit, and it will reverse as the remaining work is performed.
Is billings in excess of costs the same as deferred revenue?
They are close cousins but not identical. Under ASC 606 the correct term is a contract liability, and it is measured and netted contract by contract, including conditional retainage. The legacy caption billings in excess of costs and estimated earnings came from superseded guidance and its arithmetic is not the same.
How do you record costs in excess of billings?
You do not book it as a journal entry off the invoice. You calculate earned revenue as contract price multiplied by percent complete, compare it to amounts billed to date, and record the excess as a contract asset with the offset to revenue. It is a period-end computation driven by the WIP schedule.
Why do sureties care about my WIP schedule?
The WIP schedule shows whether reported profit is real and whether the company is financing itself with unearned billings. Underwriters use it to gauge risk and set bonding capacity, so a clean, current WIP directly affects how much work you can bond.
How often should contractors review over/under billing?
Monthly. Reviewing the WIP once a year means billing drift and margin fade are discovered long after you could have corrected them. A monthly review catches unpriced change orders and cash risk while there is still time to act.
In contracting, if you book billings in excess of costs, do you book any revenue at that point in time?
Yes — you book revenue, but not the amount you billed. Under percentage-of-completion accounting, revenue follows the work you have actually performed, not the invoice you sent. The portion you billed ahead of that work is not revenue at all. It is a contract liability that sits on the balance sheet until you earn it.
Both halves of that answer are true in the same period, which is what trips contractors up. You do recognise revenue. You do not recognise the overbilled amount. Billings in excess of costs and estimated earnings is a contract liability — it says the customer has paid ahead of the work delivered, and you still owe them that work.
Worked example. A $1,000,000 contract with $800,000 of estimated cost, so $200,000 of estimated gross profit. To date you have incurred $400,000 of cost and billed $600,000.
- Percent complete: $400,000 ÷ $800,000 = 50%
- Revenue earned to date: 50% × $1,000,000 = $500,000
- Amount billed to date: $600,000
- Billings in excess: $600,000 − $500,000 = $100,000
The journal entry — the part a summary answer will not give you:
- Dr Accounts receivable $600,000
- Cr Contract revenue $500,000
- Cr Contract liability — billings in excess $100,000
Contract cost of $400,000 is recorded separately against cash, payables or accrued cost. Revenue reaches the income statement at $500,000, not $600,000. Gross profit to date is $100,000 — exactly 50% of the $200,000 you expected, which is the internal consistency the method exists to produce. The $100,000 of billings in excess never touches the income statement until you perform the work.
The mirror situation, costs in excess of billings, is a contract asset: you have earned more than you have billed. That one is worth watching closely, because it is usually a billing or documentation problem rather than an accounting one, and it is financed out of your own working capital until you fix it.
One caution that matters more than the mechanics: this only works if your estimated total cost is honest. Percent complete is a ratio, and understating the remaining cost inflates both percent complete and recognized revenue. That is how a job looks profitable for three quarters and then produces a large fade at closeout.
Where these lines sit on the balance sheet
The position is netted at the individual contract level, so one contract is either a contract asset or a contract liability and never both. Retainage is the part most contractors present incorrectly. We cover the presentation rules, the netting trap and where conditional retainage now belongs in our guide to contract assets, contract liabilities and retainage on a contractor balance sheet.
How to read a construction WIP report
Every column on a work-in-progress report answers one question, and the over/under line is the last of them. We break the schedule down column by column in our guide to the construction WIP schedule and percentage of completion, including how percent complete is derived and where estimate updates change the earned revenue figure.
The tax layer most contractors miss
None of the above is how the numbers reach your tax return. Section 460 requires percentage of completion measured strictly cost-to-cost, with its own definition of allocable costs, and the 2025 law change reopened the completed contract method for multifamily builders. We set out the thresholds, the exceptions and the look-back method in our guide to long-term contract tax rules for contractors.
Where the accounting judgment actually lives
Everything above is mechanical only in appearance. In practice the hard calls are estimating cost at completion honestly when a job is going sideways, deciding when an unpriced change order is supportable enough to enter the contract column, knowing which costs to exclude from the cost-to-cost measure, and keeping the book and tax positions reconciled as they drift apart. Those are judgment calls, and they are the difference between a WIP a surety trusts and one it discounts.
That is the work behind our construction accounting services and the monthly construction reporting package: a WIP schedule that is current, a job cost system that feeds it correctly, and an over/under position you can explain to a lender before they ask. If you want to go a level deeper on the mechanics, start with our guide to WIP schedules and percentage of completion, and on the balance sheet side, how retainage is accounted for and how change orders should hit the schedule.
This article is general information about construction accounting and tax methods and is not advice for any specific contract or taxpayer. Method changes under §460 and §448 have procedural requirements that depend on your facts.
Get your WIP and billings under control
At Precision Accounting & Consulting, our construction practice builds and reviews WIP schedules so New York contractors always know their true earned revenue, over/under position, and job-level margin. Learn more about our construction job costing services and our broader construction accounting services, and reach out for a WIP review.
This article is for general informational purposes only and does not constitute accounting or tax advice. Consult a qualified professional about your specific situation.
Related: Billings in excess only tells part of the cash story. Retention withheld on every progress draw compounds the gap — see our guide to construction retainage accounting.
See the reports: Our Construction Reporting Package shows sample job costing, WIP, labor efficiency and burden reports we build for contractor clients.
Billings in excess and costs in excess only calculate correctly when the underlying accounts are structured for it. A construction chart of accounts built around job cost categories is what lets you pull cost-to-date by job each month without rebuilding a spreadsheet by hand.
The billing side of this equation usually arrives on a standard AIA pay application, and the schedule of values behind that application is what decides whether your percent complete is defensible. We walk through what an AIA G702 pay application actually does to your books and why the certified payment amount is never the same number as earned revenue.
For the presentation rules and the 2025 change to retainage classification, see what a progress billing does to your books.
Keeping the over/under position honest is monthly work, not a year-end exercise: cost coding, estimate updates and a WIP schedule someone actually reads. Contractors who do not want a full finance department in-house usually buy it as a service — that is what our outsourced accounting services cover.
Over- and underbilling sits inside a longer chain — schedule of values, progress billing, retainage, WIP — and we have written each link of it up separately. Our Knowledge Hub collects every article we have published, sorted by the industry it was written for, if you want the rest of the construction set.
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.