What is the difference between overbilling and underbilling on a WIP schedule?
Overbilling and underbilling describe the gap between how much work you’ve completed on a project and how much you’ve billed the client. They show up on a Work in Progress schedule as opposite line items, and they affect your balance sheet in different ways.
Overbilling happens when your billings exceed the costs you’ve incurred relative to total estimated project costs. If a project is 40% complete based on costs but you’ve billed 60% of the contract, the difference is overbilling. This shows up as a liability on your balance sheet because you’ve collected money for work you haven’t performed yet. You owe that work to the client. The formal term you’ll see on financial statements is “billings in excess of costs and estimated earnings.”
Underbilling is the opposite. You’ve completed more work than you’ve billed for. If a project is 60% complete but you’ve only billed 40%, that gap is underbilling. This shows as a current asset because you’ve earned revenue that you haven’t collected yet. The formal term is “costs and estimated earnings in excess of billings.” You have a right to bill for that work and you should be collecting it.
A simple example helps. Say you have a $500,000 contract with estimated costs of $400,000. You’ve spent $200,000 so far, which means the project is 50% complete. At 50% completion, you’ve earned $250,000 in revenue. If you’ve billed $300,000, you’re overbilled by $50,000. If you’ve only billed $200,000, you’re underbilled by $50,000.
Neither overbilling nor underbilling is automatically bad, but patterns matter. Consistent overbilling across all projects means you’re front-loading cash collection, which helps cash flow but creates a large liability position. Consistent underbilling means you’re financing the client’s project with your own money, which strains cash flow and can signal billing process problems. Bonding companies and lenders look at both carefully because the pattern tells them how well you manage projects and cash.
The WIP schedule has to be tracked per project, not in aggregate. A company might look balanced overall but have one project severely overbilled and another severely underbilled. Construction job costing that tracks labor, materials, and subcontractor costs by project is the foundation for producing an accurate WIP schedule. Without reliable cost tracking at the project level, your overbilling and underbilling numbers are meaningless.
Bonding companies use WIP schedules to evaluate whether you can handle additional bonding capacity. Lenders use them to assess the real financial health of your company beyond what the income statement shows. If your WIP schedule is inaccurate or you can’t produce one, it raises red flags that can cost you bonding capacity or loan approval.
Keeping your WIP schedule current requires updating cost estimates regularly. The original estimate rarely holds perfectly, and failing to revise it means your percent-complete calculation drifts from reality. A project where costs have overrun the original estimate will show misleading overbilling or underbilling numbers until you update the total estimated cost. This is where many contractors get tripped up. They set the estimate at the beginning and never revisit it.
If you’re a contractor in the Phoenix area working with bonded projects or pursuing larger contracts, having bookkeeping services that understand WIP reporting is not optional. Accurate WIP schedules are how you prove financial health to the people who decide whether you get the next bond or the next line of credit.
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More Questions
How do I calculate percentage of completion for revenue recognition on long-term contracts?
Use the cost-to-cost method. Divide total costs incurred to date by total estimated project costs to get your completion percentage, then multiply by the total contract price to determine earned revenue. Update your cost estimates monthly because they will change.
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Use your practice management system for claims and aging, then reconcile monthly into QuickBooks Online. Set up each insurance payer as a customer in QBO so you can track payments, denials, and adjustments by payer.
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Use sub-customers for each job, classes for cost categories like labor and materials, and enable the Projects feature for tracking. The chart of accounts needs to be structured for construction or the reports won't tell you anything useful.
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Track each change order as an amendment to the original contract. Update the total contract value and revised cost estimate in your WIP schedule, and keep unapproved change orders separate until the client signs off.
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