Billings in excess is a key financial term used in the construction industry. It refers to the dollar value charged to customers that is in excess of the costs and profits earned on a project to date, as explained by Businesscon.org. Many contractors bill customers before the job is fully complete in order to cover ongoing costs. Billings in excess represents the amount a contractor owes a customer for work still left to finish on a project.
Billings in Excess Explained
When a project is underbilled, the billings in excess figure reflects work already done but not yet invoiced. When overbilled, it covers work not yet completed but for which the client was already sent an invoice.
Billings in excess is always used with the percentage of completion accounting method in construction. This method transfers value to the income statement and captures costs as the contract progresses over its timeline. The percentage of completion approach is often utilized for long-term construction projects lasting over a year and by contractors earning more than $10 million annually in revenue. It’s important to note billings in excess does not take into account whether a customer has paid, only that an invoice was issued.
Dangers of Overbilling and Underbilling
Careful monitoring of billings in excess is critical, as overbilling and underbilling can threaten a company’s financial stability.
- Large underbillings may point to slow billing, unapproved change orders, and inaccurate cost completion estimates. They can cause financial backers like banks and investors to pull support.
- Substantial overbillings from heavy early stage billing or advanced payments can make the estimated cash required to complete a job exceed what can still be invoiced before completion. This excess amount, called “Job Borrow”, leads to negative cash flow for the remainder of the project. Large overbilling must be offset on the balance sheet asset side by cash and receivables.
Construction contractors and accountants must be able to calculate the billings in excess value, report it properly, and control its financial impact, Businesscon.org emphasizes. Careful billing in excess monitoring and management is essential for healthy construction company finances.
Tips for Keeping Your Financials in Order
Keeping reports and schedules well organized helps maintain financial control, subsequently improving profit margins. Who doesn’t want to improve their profits?
Keep Balances Sheets Up to Date
Maintaining accurate balance sheets is critical for construction companies. A balance sheet provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It shows what a company owns and owes. Balance sheets work together with income statements, which list revenues, costs, and expenses over a set fiscal period to demonstrate if a company is operating to plan. Inaccurate balance sheets lead to incorrect income statements and overall financial reporting.
Estimate Project Costs Accurately
To provide more accurate project cost estimates, contractors should not simply generalize expenses. While reviewing past job and task completion times can inform projections, each project varies. To account for job-specific productivity factors like weather, site access, and worker experience, identify and mitigate their effects when estimating. Break down all necessary tasks in a work structure to avoid omitted steps. Keep everyone updated on plans and specifications. Taking time to estimate accurately helps avoid unforeseen costs and potential overbilling.
Get All Change Orders in Writing
Change orders are common in construction, especially for subcontractors handling the bulk of project expenses. Always get added work and compensation in writing, with formal approval. While verbal change order agreements may seem fitting, written documentation is essential to safeguard finances.
Send Notices For Payments Before They Are Due
Sending preliminary notices or NTOs (Notice to Owner) for payments lets clients know you reserve the right to file a mechanic’s lien if unpaid. This prioritizes your payment. Late payments severely impact cash flow.
Keep Detailed Records
Detailed, accurate invoices expedite the payment process. Incorrect or incomplete invoices delay payment, reducing cash flow. Missing, illegible, or inaccurate items give clients leverage to withhold payment. Maintaining detailed records and solid invoices helps ensure you get paid.
Control All Expenses As Much As Possible
Accurate bidding, reducing overtime, avoiding overstaffing, and paying only for hours worked helps manage expenses and cash flow. Eliminating inefficient manual processes saves time and money. Technology solutions like time tracking, bidding, and HR software automate slower processes and provide expense awareness to cut unnecessary costs.
ExakTime’s solutions address construction companies’ financial challenges. Our web-based time tracking and scheduling tools capture accurate clock-in/out times to manage labor costs in real time. Robust customizable reporting empowers informed business decisions on the go. Contact us to see how improving payroll processes can help manage projects and cash flow.
Summary – Understanding Billings in Excess
Accurate financial management is critical for construction companies to maintain healthy cash flow and avoid potential overbilling issues. This requires diligent tracking of balance sheets, income statements, and expenses, along with detailed documentation like preliminary notices and change orders.
Careful project cost estimation accounting for all tasks and productivity factors helps prevent unforeseen costs. Leveraging technology solutions to automate manual processes provides greater expense control and efficiency.
With robust reporting and time tracking, construction firms can closely monitor labor and other costs to inform smart bidding and staffing decisions. Strong financial oversight and documentation provides the foundation for timely payments, informed decision-making, and ultimately, sustainable growth.