Underbilling happens when the revenue a contractor has earned on a job, based on percentage complete, is more than the amount it has billed so far. It shows up on the balance sheet as an asset, but it is cash the contractor has not asked for yet.
Review invoices, committed costs, and cash timing together before making project decisions. AI-generated illustration.
Underbilling is the gap between what a job has earned and what has been invoiced, when earned is higher. Contractors who use the percentage of completion method calculate earned revenue from costs incurred to date, then compare it to billings. If billings are behind, the difference is an underbilling, often labeled "costs and estimated earnings in excess of billings" on financial statements. The opposite is overbilling.
Underbilling only shows up if you compare cost and billing on each job every month. Contractors who look only at the bank balance usually find it late.
How to calculate it
Percent complete equals cost to date divided by total estimated cost.
Earned revenue equals percent complete times the contract value.
Underbilling (or overbilling) equals earned revenue minus billed to date.
A worked example
Say a concrete contractor has a $900,000 parking structure job with an estimated total cost of $750,000. Through June it has spent $450,000 and billed $480,000.
Underbilling calculation (example)
Line
Amount
Contract value
$900,000
Estimated total cost
$750,000
Cost to date
$450,000
Percent complete (450 / 750)
60%
Earned revenue (60% of $900,000)
$540,000
Billed to date
$480,000
Underbilling
$60,000
The job has earned $60,000 more than it has invoiced. That $60,000 of labor and material is already paid out of the contractor's pocket. It appears on the WIP report and balance sheet as an asset, but it is not collectible until it is billed.
Why underbilling happens
Slow billing. Work was done in the last week of the month and missed the pay app cutoff.
Unapproved change orders. Costs for extra work are on the job, but the change is not approved, so it cannot be billed. See change order.
Back-loaded schedule of values. Early activities were under-valued, so billing lags actual cost.
Cost overruns. Costs ran higher than estimated, which inflates percent complete. This is the dangerous kind, because the underbilling may never be billable.
A bad estimate to complete. If total estimated cost is too low, percent complete is overstated.
Why sureties and lenders watch it
A large or growing underbilling can mean the contractor is financing the job, is behind on paperwork, or is hiding a loss. Bonding companies and banks often look harder at underbillings than at overbillings for that reason. When a job keeps showing underbillings month after month, the first question is whether the cost to complete estimate is honest.
How to fix it
Bill all completed work every period, including stored materials where the contract allows.
Push pending change orders to approval and bill them as soon as they are signed.
An asset. It represents revenue earned but not yet billed. Overbilling is the liability.
Is underbilling bad?+
Not always. A small underbilling from timing is normal. A large or persistent one may mean unbilled change orders, slow billing, or a job losing money, so it needs explaining.
What is the difference between underbilling and accounts receivable?+
Accounts receivable is billed but not yet collected. Underbilling is earned but not yet billed, so it is one step further from cash.
Do small contractors need to track underbilling?+
If you use percentage of completion, need bonding, or have bank covenants, yes. It is also the clearest early warning of a job going sideways.
82% of construction business failures are caused by cash flow problems. GCs wait an average of 83 days for payment. Overbilling vs underbilling swings $400-500K on a $5M company. This episode teaches the 13-week cash flow forecast method that the most profitable contractors use and most of your competitors do not.
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Read the full episode transcript
Published transcript from Scaling Legends. It may contain transcription errors. View the source transcript.
82 % of construction businesses that go bankrupt this year will have, honestly, absolutely flawless workmanship. I mean, they won't lose out on competitive bids, and their clients will probably be thrilled with the buildings they hand over. Yeah, which is pretty wild to think about. Right. So what actually kills them? Welcome to this special deep dive on the Scaling Legends platform. I'm Justine. And I'm Nicole. And today, Nicole, we are dismantling a staggeringly counterintuitive reality about the construction industry. Like, if you're a contractor or, you know, if you manage finances for a construction firm, you obviously already know that the margins are incredibly tight. Very tight. Yeah. But the silent killer taking out 82 % of these failed businesses isn't
the quality of the work out in the field. It's cash flow. Yeah, it's the silent killer because it just doesn't look like a problem until it's a full -blown catastrophe. Catastrophe. Right. I mean, you can be winning massive bids. Your crews can be out there working double shifts. Your revenue on paper can look spectacular. Right. And you can still go completely bankrupt by next Tuesday. Oh, wow. Which is exactly why our mission today is to walk you through the ultimate defense mechanism. We are going to unpack the 13 -week cash flow forecast alongside WIP reporting. and the specific daily disciplines you need to actually survive. Because this is basically the operational playbook used by the most profitable contractors in America. The ones who... you know, manage to scale their operations without going broke.
Exactly. But to really grasp why this level of financial forecasting is so critical, Justine, we first have to look at why the baseline financial math of the construction industry is just inherently rigged against the contractor from day one. Okay, so let's map out that baseline math. Where is the actual friction point? It all comes down to the timeline discrepancy. Right. In the industry, we call it the float problem. Think about the physical reality of when money leaves your bank account versus when it actually comes in. Right. So your labor... force your crews out in the fields swinging hammers, pouring concrete. They expect to get paid every single week. When Friday rolls around, payroll hits. It is completely non -negotiable. Yeah, your foreman and your laborers aren't going to wait around for the developer to cut a check. I mean, they need to buy groceries this weekend. Exactly. Now look at your materials. Your suppliers generally expect to be paid on net 30 terms. So within 30 days
of the materials hitting the site, that cash is gone. Okay. But... And here's the kicker. When does the general contractor actually get paid by the owner or developer? The industry average wait time for a GC to receive payment is 83 days. Wait, 83 days? 83 days. So you are paying out of pocket for almost three full months before a single dime of revenue for that specific phase of work even hits your account. Yes. That's insane. It's like running a restaurant where you buy your groceries on Monday, you pay your chefs on Friday, but the diner who eats the meal doesn't actually pay their check until three months later. You're just floating the entire operation on your own back. restaurant analogy perfectly captures the absurdity of the cash cycle. And to make it even heavier, we have to
factor in retainage. Oh, right. Because on almost every commercial or large -scale project, the client holds back 5 % to 10 % of your approved payments until the very end of the project. They do this as insurance, basically, to ensure the punch list gets completed and the work is done to spec. So let's run the math on that really quick. If a contractor is doing, say, $10 million in work over a year, and there's a standard 5 % retainage. That is half a million dollars. Yep. You've successfully completed the work. You've already paid the weekly labor. You've paid the net 30 materials. But half a million dollars of your own earned cash is locked in a vault until the project officially closes out. Which can sometimes take months after demobilization. This isn't just a hypothetical stress test either.
According to Smart Business Automator's Market Intelligence report, 74 % of construction companies report experiencing severe cash flow challenges specifically because of this gap. Wow. Yeah. The map simply does not work without an incredibly active, disciplined approach to managing where your cash is on any given day. So if you're constantly fighting this 83 -day delay and a 5 % to 10 % penalty box on your cash, You obviously can't just log into your banking portal on a Tuesday, look at the balance and hope for the best. No, absolutely not. Managing cash flow by looking at your current bank balance feels like driving down a highway at 80 miles an hour while staring exclusively into your rearview mirror. You will inevitably hit a wall. Yeah. The way the legends of this industry survive is by engineering a
way to see the financial future before it happens. they build a forward -looking operational timeline. And that really brings us to the 13 -week cash flow forecast. Okay, a 13 -week forecast. I know we're supposed to be talking about elite top -tier strategies here, Nicole, but that just sounds like a corporate buzzword for a budget. How is this actually different from the annual budget my CPA gives me in January? It's completely different. And honestly... Conflating the two is a fatal mistake a lot of business owners make. A budget is a theoretical goal. It's a static document that says, you know, we hope to spend this much on materials and earn this much in revenue over the next 12 months. A 13 -week forecast is an operational timeline. Ah, got it. It tracks the literal, physical movement of cash in and
cash out of your bank account by the week. It doesn't care about your yearly profit goals. It only cares about whether or not your checking account will go negative in week six. Why specifically 13 weeks, though? Like, why not forecast out for the whole year or just stick to a rolling four -week look ahead? Well, 13 weeks is exactly one quarter of the year. And in the construction world, it's the absolute sweet spot for predictability. How so? It's long enough to see trouble coming over the horizon so you can actually maneuver, but short enough that the data is still highly accurate. If you try to forecast day -by -day cash flow for nine months out, you aren't forecasting anymore. You're just guessing. Right. Because of weather or... Exactly. Weather delays, supply chain disruptions, change orders. It makes it impossible. But 13 weeks gives you clear... Okay,
let's elevate this from the theoretical to the practical. If I'm an operations manager or an owner sitting down to build this, I know the basic architecture of a spreadsheet. Top line is my actual cash in the bank today. Bottom line is my projected closing balance. Yep. It's the middle part, the forecasting of the moving pieces. That gets incredibly messy. So how do we accurately project cash in when we are basically entirely at the mercy of when a client decides to cut a check? That is the hardest part of the forecast, and it requires brutal honesty. You cannot map your cash in based on when you send the invoice. Oh, interesting. You have to map it based on historical client behavior and that 83 -day industry average. If you submit a progress billing in week one, and you know this specific developer always takes 45 days to process, you don't put
that cash receipt in week two. You place it in week seven. So what happens when a client disputes a line item on a progress billing? Let's say we were in week four and the owner pushes back on a percentage of completion for the HVAC installation. This is where the 13 -week forecast becomes a living, breathing tool. The moment that dispute happens, you open your forecast and you manually push that expected cash receipt out from week four to week eight or week 10, depending on how long you think the negotiation will actually take. And by shifting that one single cell in the spreadsheet, I immediately see the ripple effect down the line. I can instantly see if delaying that HDAC payment breaks my ability to make payroll in week six. Yes, exactly. Now let's talk about the cash out variables because forecasting labor against fixed price contracts
is another massive hurdle. Unlike rent or equipment leases, which are fixed, your labor costs are highly variable. Because of field conditions. Right. If it rains for five days straight, your crews aren't working, which means your payroll costs actually drop for that week, but your project timeline extends. So my forecast needs to constantly adjust to the reality of the field. If weather delays the concrete pour, I have to shift the material payment and the labor costs into subsequent weeks. Exactly. This is why the golden rule of the 13 -week forecast is that it must be updated every single Monday morning. It usually takes a controller or a business owner about 30 to 60 minutes to recalibrate the numbers based on what happened the previous week. I now have 10
entire weeks to solve the problem. Exactly. I'm not waking up on a Thursday morning in a blind panic realizing I can't fund Friday's payroll. You saw the iceberg from miles away. With two and a half months of runway, you can strategically call in favors. You can negotiate extended terms with a vendor. You can hustle a client for a past due invoice, or you can draw on a line of credit proactively. It fundamentally shifts your posture from panic to strategy. Okay, so the 13 -week forecast tells me exactly when I'm going to run out of cash. It highlights the timeline. but it doesn't really tell me why. If my forecast is showing a massive cash hemorrhage in week eight, how do I know which specific project is causing the bleed? If I'm running five commercial jobs simultaneously, the forecast treats all that cash as one big pool. This is the critical
transition point. To understand why your cash is moving the way it is, you have to look at the financial health of the individual projects. and that requires a WIP, Schedule Work in Progress, reporting. The 13 -week forecast and the WIP schedule are essentially two halves of the same brain. I've heard some accounting professionals say that WIP reporting is where contractors discover the danger of doing too good of a job. Oh, absolutely. Walk us through the mechanics of a WIP schedule. What data are we actually calculating here? A WIP schedule calculates your true profitability on a project by project basis using a method called cost to cost percentage of completion. This is the only JAP -approved method for construction accounting. Okay. For every active project, you track the total contract value, your actual costs
incurred to date, your billings to date, and your estimated cost to complete the job. Okay, let's put some real numbers to this so we can really understand the mechanism. Sure. Let's say you have a project with a contract value of $1 million. You look at your job costing, and you have spent $250 ,000 in hard costs so far, labor, materials. Got it. You sit down with your project manager and you estimate it will cost another $750 ,000 to finish the job. Your total estimated cost is $1 million, meaning this is going to be a zero profit job. But let's just use it for easy math. Fair enough. If you've spent $250K out of a total $1 million in costs, you are exactly 25 % complete with the project. Understood. So because I am 25 % complete based
on my costs, I should have billed the client for 25 % of the contract value. So I should have billed $250 ,000. Correct. And this brings us to the most vital concept in WIP reporting. Overbilling versus underbilling. Let's look at overbilling first. What if you are 25 % complete, but you managed to aggressively bill the client for 35 % of the contract value? Okay. You've billed $350 ,000. That means I've billed $100 ,000 more than the work I've actually performed, which in a lot of industries, that would be considered an accounting error. But in construction, that's considered strategic. Highly strategic. Overbilling is known as billings in excess of costs. It means you are cash positive on that specific job. You
are successfully holding the client's money and using their cash to fund the next phase of the project rather than tapping into your own operating reserves. So you're front -loading the cash. You're basically using the developer's money as your working capital instead of paying interest on a bank line of credit. Exactly. But the inverse of this underbilling is the trap that bankrupts companies. Underbilling is costs in excess of billings. Let's say you are 50 % complete with a job based on your costs, but you've only billed the client for 30 % of the contract value. Wait, let me trace the operational logic here because this points back to the friction between the field and the office. If my crews are out on the job site and they are absolutely... crushing it. Like they get way ahead of schedule. They install all the drywall in record time. So my labor and material costs skyrocket for that month.
But my project manager is too busy putting out fires to write down the daily logs. And my office admin doesn't realize the drywall is done. So we don't bill the client for that specific progress immediately. And you are severely underbuilt. You have already paid out of pocket for the labor and materials to get that drywall up, but you haven't asked the client for the money to cover it. You are literally financing their construction project with your own cash. You have become an involuntary, interest -free bank for the developer. That shifts the entire risk profile of the business. Wait, so doing an incredibly efficient, fast job in the field can actually bankrupt the company if the back office billing doesn't match the pace of the construction? Yes. The financial swing is terrifying. If you run a mid -sized
firm, doing $5 million in revenue. The difference between strategically overbilling by 5 % and accidentally underbilling by 5 % is a massive $500 ,000 swing in your cash position. Oh my God. That is half a million dollars just sitting there, completely dependent on how accurately and quickly you align your billing cycle with your field progress. This makes complete sense why external partners demand these documents before they do business with you. Like, I'm pretty sure smart business automators market Intelligence Report explicitly points out that this is the exact reason why banks, surety bonding companies, and CPAs demand to see your WIP schedules. They absolutely do. They know that if you don't understand your over or under billings, you look completely unmanageable to a lender. If you try to secure
a bond for a new project and you have massive under billings, the surety company just sees a business that is hemorrhaging cash to finance its clients. You cannot fly blind. If your WIP schedule shows you are severely underbilled on three out of five projects, you instantly know why your 13 -week forecast is showing a negative cash balance in week eight. The data connects. All right, so understanding the mechanics of a WIP schedule and a 13 -week forecast is one thing, but how do we actually execute this daily without adding like 40 hours of administrative burden to our week? The theory is pristine but the reality of a construction office is usually chaotic. It comes down to marrying the right technological mechanisms with ironclad operational discipline. Historically, the biggest bottleneck
was getting the data from the dirt to the desk. Right. If the accounting software in the office doesn't talk to the project management software in the field, underbilling is inevitable because the office literally doesn't know what work was completed today. So modern systems pull field data, daily logs, labor hours, material deliveries directly into the billing dashboard so the invoicing can happen instantly. It just removes the human bottleneck. Exactly. Now, there are a lot of options for your tech stack. You've got Foundation, which is around $400 a month for the mid -market, Sage 100, Procore Financials, if you're already on Procore, or even QuickBooks paired with Noify for a budget option. Or even just a free Excel template from the CFMA. Right. Whether you are utilizing a robust ERP system or integrating specialized construction software, the mechanism
must bridge the gap between field progress and office invoicing. But, and this is crucial, technology won't save a broken process. Yeah. You still have to enforce the five rules of cash flow. Let's walk through these rules using a chronological scenario. Let's say a contractor finishes a major phase of a project on a Tuesday. The drywall is up, taped, and mudded. What happens next? Rule number one kicks in immediately. Bill Fast, you invoice the absolute second the work qualifies under the contract. Remember that 83 -day way we talked about? Oh, yeah. Every single day you delay sending that invoice from the office is another day added to your wait. If the work finishes on Tuesday, but your admin team batches all their invoicing for the following Friday, you just voluntarily added 10 days to your cash flow drought. Ouch. So the invoice is at the door. Now we wait.
But rule number two is... Collect aggressively. How do you do this without ruining the relationship with a developer or a general contractor who you actually want to work with again? You normalize the follow -up by setting expectations at the very beginning of the relationship, usually during the kickoff meeting. You let them know your accounting team is strict about terms. Just blame the accounting team. Exactly. If the contract says net 30, it means someone from your office is picking up the phone and calling their account's payable department on day 31, not day 45. Net 60 means something is fundamentally broken in the payment chain and work might need to pause. You cannot afford to be timid about collecting money you've already paid your crews to earn. And this is really where automation acts as the enforcer. Smart Business Automator's Market Intelligence
report notes that automated collections tracking is the easiest way to ensure payment follow -ups and retainage alerts don't slip through the cracks. If an invoice hits day 31, the system automatically pumps the follow -up, which kind of removes the emotional friction of asking for money. It completely takes the burden off human memory, which leads directly into rule number three, manage retainage. We established earlier how a 5 % retainage can lock up half a million dollars. Right. The rule here is that you must track every single dollar of retainage across every project in a dedicated ledger. And you bill for those releases the absolute minute the contractual retention period ends or the certificate of substantial completion is signed. Because if you don't track it, the
client certainly isn't going to remind you to ask for it. It just sits in their bank account earning interest for them instead of you. Precisely. Now, as you finish that project and start preparing for the next one, rule number four applies. Do not front materials. Oh, this is a big one. Do not act as the bank for your clients. If you are starting a job that requires $100 ,000 in specialized lumber or custom steel, and you buy it out of pocket before receiving a deposit, you are extending them a massive line of unsecured credit. So how do you practically enforce that in negotiations? Because owners naturally want to hold their cash as long as possible, too. You negotiate material allowances up front, demanding a deposit to cover those specific hard costs before mobilization. Alternatively, you require owner direct purchasing for big ticket items.
Let the developer buy the custom steel directly from the manufacturer so the liability and the cash outlay never even touch your books. Protect the cash at all costs. Always. And that brings us to the final safety net rule number five, maintain a line of credit. But the strategic nuance here is that you have to secure it before you actually need it. Banks evaluate risk based on your current financial health. They only like to lend money to businesses that have plenty of it. Trying to get a commercial line of credit when your 13 -week forecast is already flashing red and your WIP shows massive underbillings is impossible. It's like trying to buy umbrella insurance while your living room is currently flooding with three feet of water. Exactly. The insurance agent is going to laugh you out of the room and the underwriter is going to slam the door. You have to secure the umbrella while
the sun is shining. That is exactly how you have to view capital. Secure a line of credit during your most profitable quarter. Let it sit there with a zero balance. It costs you nothing to keep open, but it gives you the operational leverage to handle a sudden 60 -day payment delay from a major client without missing a single payroll cycle. This entire conversation really reframes what it means to run a construction business. It's not just about building incredible structures. It's about building an airtight financial machine. Think about it this way. You would never, ever attempt to build a complex, multi -million dollar commercial building out in the field without meticulous, highly detailed blueprints. You wouldn't just show up to an empty dirt lot with a stack
of lumber, look at your foreman, and hope it forms a stable building. No, the city inspectors would shut you down in an hour, and the building would eventually collapse. Yet every single day, contractors are trying to build a multi -million dollar business in the office without a financial blueprint. That is exactly what the 13 -week forecast and the WIP schedule provide. They are the structural blueprints for your company's survival. If you sit down this Sunday, build out your forecast, and you realize that week seven is going to plunge into the negative, that 30 minutes of planning just gave you the chance to save your own business. It's the ultimate shift from being a reactive victim of the industry's timeline to being a proactive architect of your own cash flow. Taking back control of the timeline is how you scale without breaking. If you know
a contractor who is dealing with cash flow headaches or trying to scale up without going broke, send them this episode. It could literally save their business. Hit follow on whatever app you're listening on so you don't miss tomorrow's Intel. And finally, a reminder to visit smartbusinessautomator .com to learn more about the AI platform built to help construction companies scale operations seamlessly without drowning in administrative work. From both of us here, thanks for joining this deep dive. We'll catch you next time. Yeah.
