A cost-plus contract is an agreement to reimburse a company for expenses plus a specific amount of profit, usually stated as a percentage of the contract’s full price. They are also used in aerospace and defense since these projects typically have tremendous budgets and can take years to complete. Progress billings are common for large-scale construction projects, and the aerospace and defense industries. While under certain circumstances it may be appropriate to classify retainage as a receivable, this will be limited to situations in which the right to payment of retainage is solely contingent upon the passage of time. Generally, this is appropriate after the conditions upon which the retainage was contingent have been satisfied and before the customer has paid the retained amount. Accordingly, to determine proper classification of retainage, it’s critical to determine if the right to consideration is conditional or unconditional upon something other than the passage of time. Under ASC 606, the scope of a change order determines if it should be considered a separate contract or should be combined with the original contract.

Retainage provides a financial incentive to help ensure the contractor completes their work appropriately and in accordance with the contract terms. The obvious answer is the most telling here, why would a contractor not bill for all the work done to date? If that is the case, it is in the contractor’s best interest to bill for the work performed, unless, the project is not going as well as planned. Sometimes underbillings are a sign that a project is not performing as well as anticipated. The billing is less than the costs and profit because owner and the contractor disagree about how far along the project is. In the surety’s experience, sometimes unapproved change orders never get approved and the project ends with a loss. While far from the majority of the time, sometimes underbillings are a sign that there is profit fade on that project .

Earned Revenue To Date

On the balance sheet, overbillings are shown as liabilities because even though the physical revenue has come in, the correlating work hasn’t yet been completed. For example, if a contractor has completed 20% of the workload and has already billed 50% of the job, they are overbilled by 30%. In construction however, our projects are generally in progress, often spanning multiple billing periods with revenue arriving sporadically. This makes it very difficult to reconcile expenses with revenue, and can lead to balance sheets that paint a very dismal picture of financial performance.

A liability account, or “billings in excess of costs” means that the contractor has billed the customer for work not yet done which is where all contractors would prefer to be-placing the contractor ahead of the customer on a cash flow basis. This can produce a negative effect on cash flow, leaving the business without the money needed to pay suppliers, sub-contractors or employees. Having a schedule of values included in the progress billings process helps contractors and owners develop a transparent process where all of the financial details are known upfront. It also protects construction companies legally and financially by having the estimates in writing so that there are no surprises at the completion of the project. Timing Differences typically occur due to differences in a contractors close cycle and their accounting process.

Performance Bond Underwriting Basics

Before determining if a contract meets one of the above requirements, construction companies will need to understand when transferring control of the asset, as defined within ASC 606, occurs. ASC 606 defines “control of an asset” as the ability to direct the use of and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from an asset.

The combined information, within a quick couple of hours, gave us the amount the client had earned. So, when you are unsure of your financial situation, use this short-cut to make sure your balance sheet is correct. Otherwise, look no further at your financials; they will likely be inaccurate and useless. Large overbillings or underbillings could be an indication of problems that could jeopardize the stability of a construction contractor’s bond program.

What Are Billings in Excess of Costs?

This process includes establishing a payment schedule or frequency of payment according to certain milestones agreed upon by both parties. Once the work begins, and the milestones are reached, the contractor can then start submitting invoices to the client. The schedule of values also helps to determine whether there were cost overruns or the project came under budget. For example, the schedule of values would show what was paid for each task as well as the initial estimate. As a result, it can be determined at what point in the construction phase did the project exceed the estimated project cost. It allows the person billing—usually a contractor—to fund the project and themselves as the project continues.

Alternatively, if you have 60% of a project billed and only 30% completed, this may cause unnecessary confusion down the road. It is thus important to know why you are over or underbilled on a particular job. Often the result of a contractor not invoicing on time , underbilling can also be driven by poor up-front cost estimation, unapproved change orders, incurring costs for non-billable work, and even forgotten frontloading. Underbilling can lead to serious cash-flow problems, forcing the contractor to pull funds from other projects (job-borrow) or from personal accounts, or even worse, to apply for high-interest, short-term loans.

Progress Billings

Within the construction industry and across nearly all industries, simply using contract assets and contract liabilities to describe such amounts on a company’s balance sheet is the most clearly understood description. Now that we’re well past the transition to Topic 606, using other terms to describe such amounts may create more confusion for financial statement users than it might clarify. However, if a company desires to use terms other than contract assets and contract liabilities, Exhibit 3 presents a few cost in excess of billings alternatives considered acceptable by many. Working capital is one of the key financial metrics considered by the underwriters. If it turns out, for any number of reasons that that underbilling cannot be billed, than the working capital was overstated and the underwriter made a credit decision on information that ended up not being accurate. Depending on the frequency and severity of the underbillings, the performance bond underwriters may discount the underbillings when making its surety credit decision.

• This should produce a net positive in cash flow, where the company has more working capital on hand than expenses.
• However, unchecked O/U billing can lead to all sorts of financial problems and can throw up red flags for lenders, highlighting a company as financially struggling and/or mismanaged.
• Often the result of a contractor not invoicing on time , underbilling can also be driven by poor up-front cost estimation, unapproved change orders, incurring costs for non-billable work, and even forgotten frontloading.
• The retention amount or retainage can be 5% to 10% of the total project or for each progress value.
• This can have adverse tax implications, such as increasing the tax liability in the current period, further stressing the company’s cash flows and ability to meet operating obligations.

This may be a sign of slow billing practices, unapproved change orders being included in the contract price, and/or profit fade on the contract that has not yet been recognized in the estimated costs to complete. Be careful summing this number up; it can be quite challenging to accumulate costs incurred to date.

‘Billings in excess’ is a construction industry financial term referring to the dollar value of charges to customers in excess of the costs and profits earned to date. It is in effect, the dollar value the contractor owes back to the customer for incomplete work. A monthly balance sheet should record the estimated project completion percentage based on work performed and work remaining. If a project is 40% complete, then 40% of the total billed amount would be considered as revenue, and 60% would constitute liability in accounting records.

The RSM™ brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP. If you’re seeking assistance or support in creating or understanding your contract schedules, reach out to one of our construction team members today. To calculate over and under billings for each month, we simply https://online-accounting.net/ subtract the Earned Revenue from Total Billings. As you can see above, at the end of Month 1, total incurred cost was $13,000, and Projected Cost was $45,000. Perhaps most importantly, the WIP is used to calculate over and under billing amounts which are essential in helping you and your PMs ensure expenses are being well-managed.