What is an Equity Turnover Ratio?

Underbilling refers to a scenario in the construction industry where the actual costs incurred on a project surpass the billed amount for a specific time period. Often occurring unintentionally due to unexpected cost variations, it results in a deficit situation for the contractor. It is essentially an imbalance where the contractor has delivered more work or materials than they have billed the client for. Underbilling can strain cash flow and disrupt project schedules if not addressed promptly. While this might prove beneficial to the client in the short term, contractors need to ensure that they identify and rectify underbilling to maintain project profitability and financial stability.

A contract in the construction industry represents a legally binding agreement between two or more parties. Each party has responsibilities they are obligated to fulfil. Typically, it involves a party offering construction services and another party seeking such services. The contract details terms and conditions, the scope of work, pricing, project timelines, and dispute resolution protocols. It may also address specifics like design documents, quality of work expectations, and safety regulations. A contract is fundamental to any construction project as it safeguards the interests of all parties involved. Failure to adhere to the terms can result in legal consequences.

Cost in excess of billings (CEB), or underbilling, refers to a cost incurred by a subcontractor for work performed that has yet to be billed to the general contractor at any point in time. This is a somewhat common scenario that can arise when the cost of work expenses (labor, materials, subcontractors, etc.) hit before billings go out.

There are a few factors that can create this timing gap and lead to underbilling. These include:

• Progressive billing schedules: Many construction projects have billing schedules that are based on predefined milestones or stages of completion. However, costs are being incurred continuously as work progresses. This causes costs to build up ahead of invoices between billing cycles.
• Upfront and early-stage mobilization: Significant upfront costs go into things like materials, equipment, permitting, and mobilizing job sites before physical work even begins—especially for subcontractors. These costs typically accumulate before clients are billed.
• Pending change orders: Costs related to change orders often hit weeks or months before details are finalized and approved for billing. Diligently tracking pending change orders is crucial to ensure you ultimately collect on all revenue owed from approved changes.
• Project delays: In construction, delays are inevitable. If and when delays push out project milestones, billable events can slide further out from when the costs were incurred. These timeline gaps widen the difference between accrued expenses and billings-to-date.

CEB is reflected on financial statements as assets because it represents an unbilled receivable for revenues that will later come. Therefore, regularly monitoring CEB is critical to maintaining healthy business operations as it helps subcontractor accounting teams:

• Understand true project economics: CEB helps reveal the full profitability picture by linking incurred costs with unbilled receivables, which in turn supports more accurate revenue forecasting and job costing projections.
• Gain greater cash flow visibility: Because CEB tracking shows how much money is flowing out that’s tied up in work completed but not yet paid for, it helps them better plan and manage their cash for future expenses.
• Monitor project health: Unexpected CEB spikes could signal problems like cost overruns. Regularly comparing CEB status with the original budget is key to assessing a project’s overall health.
• Collect revenue in full: No one wants to work for free. Tracking CEB ensures that all pending receivables are ultimately invoiced and collected.
• Stay compliant: CEB reporting is required for percentage-of-completion revenue recognition, which is an important accounting standard for billing teams to adhere to.

Effective CEB oversight is much simpler with the right tools in place. With Siteline, you can easily track costs in excess of billings on each project to ensure no completed work goes unbilled. Siteline monitors all pending change orders through a project's lifespan, too, helping teams get approval quicker and convert unbilled work into invoiced revenue. If you're interested, schedule a personalized demo of Siteline here.