Billings In Excess of Costs
Billings in Excess of Costs, also known as overbillings, happens when the actual revenue earned is less than the accounts receivable billed. Overbilling occurs due to the timing difference between the recognition of costs incurred and revenue on contracts for long-term projects. It indicates that cash flow from billings is greater than the expenses recorded, which can impact financial statements and project funding. This condition is considered a liability on the company's financial statement until the revenue is collected. More than an accounting term, overbilling operates as a strategic financial tool that can significantly influence cash flow and the broader fiscal health of construction projects.
Billings in excess of costs are recorded as a liability on the balance sheet, representing cash received for services not yet fully rendered.
This situation often indicates a favorable cash flow position, allowing contractors to utilize funds for ongoing project expenses.
Over time, as project costs are incurred and revenue recognized, this liability will decrease as the billed amounts align with actual costs.
If overbilling becomes too large relative to project completion, it may signal potential issues with project execution or budgeting.
COMMON CAUSES OF OVERBILLING
Advanced Billing.
Advance billing is where construction firms bill clients for expected costs before these costs have actually been incurred.
Unrecognized Cost Savings.
This situation arises when the actual costs turn out to be lower than the initially estimated costs, but this reduction isn't immediately reflected in the financial statements or billing schedule.
Billing for Unapproved Work.
This happens when contractors invoice for additional work or modifications that haven't been officially authorized and included in the current contract.
Missing Accounting Accruals.
This typically happens when general contractors bill the client for work done by subcontractors before the costs of that work are formally recorded, usually due to a delay in processing the subcontractors' invoices.
Artificially High-Cost Estimates.
Such overestimation, particularly common at the project's outset, results in charging clients more than the current progress justifies.