What are Underbillings?

When work you’ve accomplished isn’t billed or fees you’ve incurred aren’t paid, this is known as underbilling. Almost every contractor experiences some type of underbilling at some point. However, underbilling may wreak havoc on your cash flow and earnings. Worst case scenario: If you never get payment for underbilled labor, services, or material, you may really lose money on a job. 

According to Levelset, “Underbilling in the construction industry describes the practice of not fully billing for all of the labor, materials, and services delivered in a billing cycle. Underbilling can lead to significant cash flow problems for contractors on their projects and jobs. A discussion of underbilling in the construction industry continues below.”

Underbilling as a result of sluggish billing methods should only have a brief negative impact on cash flow. From a cash flow viewpoint, the firm should “become whole” on the project after they “catch up” on their project billing (if you ignore the time value of money). 

Underbilling is Caused by a Variety of Factors

There are a variety of reasons why a job may be underbilled. The following are a few of the most common: 

Project Management Innefficiencies

When a contractor’s billing cycle is missed or a lack of organization occurrs, underbilling might be the result. Also, a PM inability to properly manage the project, create timely deadlines, and execute the project scope accordingly can all lead to underbillings. 

Costs of the project were underestimated

Underbilling can occur when project expenses surpass the entire contract cost. Re-estimating expenses as the job advances is always a smart idea. Otherwise, you risk understating expenses while overstating sales and profit, resulting in cash-flow issues and profit erosion. If you don’t find out about the underbilling until the conclusion of the task, you may have to reinvest money to finish it. 

Change orders that haven’t been authorized or that have been contested

Underbilling is a typical occurrence. Contractors risk not being paid if they do work that hasn’t been permitted by the owner. Before beginning work, you should always file change orders and get signatures.

Unbillable materials

A contractor may acquire the materials required for a project, but he or she cannot bill for them until they have been installed, inspected, and authorized to ensure that they work as planned. This is an underbilled cost unless the owner provides for on-site storage.

Trends in underbilling are being tracked

The management, internal processes, and style of a contractor may all be gleaned through underbilling statistics. Underbilling progress can be tracked via semi-annual or quarterly work-in-progress (WIP) reports, which can assist in identifying possible issues. It’s crucial to keep track of job vitals from one work in progress to the next. Is the number of underbillings rising or falling? Is the contract pricing different now? What effect does this have on gross profit (GP)? 

How does Bad Project Management Impact Underbillings

According to Irvine Bookkeeping, “One of the most common reasons why construction companies are stuck in underbilling situations is not to complete the progress invoicing on time. If a contractor and customer agree to set up a fixed time to send an invoice and make payment, the contractor can not get up-to-date costs to be paid. For example, the contractor is expected to get his progressing invoice on the 1st of every month and get paid around the 10th, he can not have costs occurring from 2nd to 10th paid. That leads to an underbilling period.”

In other words, the contract manager holds a large responsibility when it comes to ensuring underbillings do not occur. From managing spend, invoicing, collecting payments, paying subcontractors, and keeping the project on task, the PM is largley responsible for the success of the project.

Best Ways to Avoid Underbillings

Underbillings can negatively impact the overall cashflow of your business and if the issue is not resolved quickly, this trend could be detrimental to your business has a whole. A lot of underbilling can affect your firm and threaten your bond approval. Below are three things you should do to stop underbilling from happening within your own company: 

• Keep accurate financial records that are done in a timely manner so that issues can be resolved in real-time
• Ensure that project managers are doing their job correctly, submitting financials on time. 
• To avoid surprises at the conclusion of a work, take numerous takeoffs during the process. Recalculate labor and material expenditures to stay on budget. 
• Send preliminary payment notices to project owners to ensure timely payments
• Document all change orders and ensure unapproved change orders are prevented at all costs

Underbilling is a fact of life in the construction industry, but how you handle it makes all the difference. Check to see if you’re getting compensated for all of the job you’ve done. Overbillings and Underbillings are two topics covered in depth by The Surety Place. Please contact your contract underwriter at The Surety Place at 866-602-5603 for further information on any underbilling difficulties you may be experiencing with your contractor clients.