A contractor is under-billed on a job when the revenue it has earned, measured by progress on the work, is more than it has invoiced. The work is in place and the costs have been paid, but the owner hasn't been asked to pay for it yet. On the balance sheet this shows up as an asset, usually called "costs and estimated earnings in excess of billings" or a contract asset. It's real value, but it isn't cash.

Some under-billing is normal timing: costs land on the 28th, the pay application goes out on the 25th. Persistent or growing under-billing is different. It usually means billing has fallen behind the work, and it's one of the most common reasons a profitable contractor runs short of cash.

How under-billing is measured

Most contractors measure progress with the cost-to-cost method:

1. Percent complete = cost to date ÷ current estimated total cost
2. Earned revenue = contract value (including approved changes) × percent complete
3. Under-billing = earned revenue − billed to date (if the result is negative, the job is over-billed)

Five common causes

• Conservative pay applications. PMs bill less than the work in place to avoid disputes.
• Unbilled change orders. Extra work done before the change is approved, then forgotten. See our change-order guide.
• Schedule-of-values imbalance. Early lines like mobilization and general conditions are under-weighted, so billing lags cost early in the job.
• Retainage confusion. Retainage is billed but held. It isn't under-billing, and mixing the two hides both.
• Bad estimates to complete. If the estimated total cost is stale, percent complete is wrong, and the under-billing figure is wrong with it.

A step-by-step way to find it

1. Update the estimated cost to complete on every active job with the project manager.
2. Run the cost-to-cost calculation above for each job.
3. Compare earned revenue to billings, and list every job that is under-billed.
4. For each under-billed job, find the cause: an unbilled change order, a lagging schedule-of-values line, or a cost posted to the wrong job.
5. Check that the total under-billing on your WIP schedule matches the contract asset on your balance sheet. If it doesn't, that gap needs explaining before anything else.
6. Decide what can be billed on the next pay application, and what needs approval first.

What under-billing is not

Under-billing isn't automatically money you can invoice tomorrow. Some of it is timing, some may reflect cost overruns that won't be recovered from the owner, and some may come from a bad estimate. Each item has to be validated against the contract and the work in place before it's billed.

This is exactly what our Under-Billing Analysis does, and the WIP Reporting service keeps it from building up again.

A work-in-progress (WIP) schedule lists every active job with its contract value, costs, progress, billings and projected profit. It's the single most useful report a contractor has, because it connects three things that otherwise live apart: what you've done, what you've invoiced, and what you'll make.

Banks and surety companies ask for it because it shows whether the profit on your financial statements is real. Contractors should want it for a simpler reason: it shows where your cash is.

The columns, one at a time

• Contract value: the original contract plus approved change orders.
• Estimated total cost: cost to date plus the PM's current estimate to complete. This is the column that most often goes stale.
• Projected gross profit: contract value − estimated total cost. Divided by contract value, it gives projected GP%.
• Cost to date: job costs posted in your accounting system.
• Percent complete: cost to date ÷ estimated total cost (the cost-to-cost method).
• Earned revenue: contract value × percent complete.
• Billed to date: total invoiced, including retainage held.
• Under-billing / (over-billing): earned revenue − billed to date.

Over-billing isn't free money

Over-billing means you've invoiced ahead of the work. It feels good for cash, but that cash belongs to work you still have to do. If you spend it on overhead or another job, you'll be short when the remaining costs arrive. Large over-billings are worth watching as closely as large under-billings.

Margin fade and loss jobs

Compare each job's projected GP% this month with last month and with the original estimate. A margin that falls month after month (margin fade) usually means costs are running over and the estimate to complete is catching up slowly. When a job's estimated total cost exceeds its contract value, the whole projected loss is normally recognized as soon as it's known, not spread over the rest of the job. Your CPA will confirm the treatment for your statements.

Making sure it ties

The total under-billings on the WIP should equal the contract asset on the balance sheet, and the total over-billings should equal the contract liability. If they don't, either the WIP or the books are wrong, and the reports going to your bank or surety will be too.

Our WIP Reporting service builds this schedule monthly and reconciles it to the balance sheet. You can see a full six-job example in the sample dashboards.

Every job changes. An owner adds scope, a design conflict needs a fix, site conditions aren't what the drawings showed. The work usually gets done quickly because the schedule demands it. The paperwork often doesn't keep up, and that's where money goes missing.

Four states every change passes through

1. Requested or identified: someone has asked for, or discovered, extra work.
2. Performed: the crew has done it, and labor and materials are in your costs.
3. Approved in writing: the owner or GC has signed off on the scope and price.
4. Billed: it appears on a pay application.

The risk is in the gaps. Work that's performed but not approved costs you money with no right to bill yet. Work that's approved but not billed is revenue you're entitled to and haven't asked for.

How unbilled changes distort your numbers

• Costs without revenue: change-order costs hit the job, but the contract value doesn't increase, so the job's margin looks worse than it is.
• Wrong percent complete: extra costs push percent complete up against an estimate that doesn't include them, and earned revenue is overstated.
• Late billing, harder collection: a change billed months later, at close-out, is much more likely to be disputed.

A change-order log that works

Keep one log per job with these columns: change number, description, date identified, value (requested and approved), status, approval evidence, cost code in QuickBooks, and the pay application it was billed on. Review it monthly alongside the WIP schedule, and list every change that's performed but not approved, or approved but not billed.

Keep the WIP in step

Approved changes should update both the contract value and the estimated total cost on the WIP schedule in the same month. If only one is updated, percent complete and margins will be wrong. Our Change-Order Tracking service maintains the log and ties it to your WIP schedule.

Whether a particular change is contractually billable depends on your contract terms. For disputes, talk to your attorney.

A profitable contractor can still run out of cash, because profit is earned as the work progresses while cash arrives on the owner's payment schedule, minus retainage, often 30 to 60 days later. A 13-week cash-flow forecast closes that gap by showing, week by week, what will come in, what will go out, and where the balance will land.

Why 13 weeks

Thirteen weeks covers a full quarter. That's long enough to see a problem coming, and short enough that most inflows and outflows are already known: scheduled pay applications, payroll, supplier terms, loan payments. Beyond that, a forecast becomes a budget.

Where the inflows come from

• Pay applications already submitted: receivables, timed by each customer's actual payment history rather than the contract terms.
• Pay applications still to come: from your billing schedule. This is where under-billing matters. Work that isn't billed this month can't be collected next month.
• Retainage releases: by job, with realistic dates. Retainage is usually released at substantial completion or close-out, not when the contract says it might be.
• Other: equipment sales, loan draws, owner contributions.

Where the outflows go

• Payroll and burden, every week
• Subcontractors, usually paid when you're paid, if your contracts say so
• Material suppliers, on their terms
• Equipment, loans, insurance, rent and overhead

Set a floor, then look for the dip

Decide the minimum cash the business needs: usually at least one payroll plus a cushion. Then look for any week where closing cash falls below it. That week is your early warning, and the time to act is now: speed up a pay application, chase a large receivable, move a purchase, or arrange a line of credit before you need it.

Connecting it to WIP

Your WIP schedule tells you how much is earned but unbilled, and so how much could be added to upcoming pay applications. Your AR aging tells you who owes what and how late they usually pay. Your retainage schedule tells you what's held and when it's due. A forecast that ignores any of them will be wrong in a predictable direction.

Our Cash-Flow Forecasting service builds and maintains the forecast, and the sample dashboards show a full 13-week example.