With the start of every new project, your construction company faces a challenge: how to manage costs, timelines, and change orders to keep the project on course and still earn a profit. Several factors in the construction industry can make it difficult to calculate the progress of a project and the costs accrued to date. This could lead to submitting invoices for less money than you’ve earned—a common mistake known as underbilling – or for more than you’ve earned – which is called overbilling.

What Causes Underbilling?

To complete a project on time and within budget, you must coordinate with stakeholders and track a multitude of costs on your balance sheet. When you have lots of moving pieces, it depends on the timely performance of everyone involved. Of course, that doesn’t always happen, which leads to construction companies underbilling.

Here are a few common reasons for underbilling and how to avoid them.

1. Missing a billing cycle

If one of your project managers doesn’t submit a construction daily report on time, then you can’t submit a bill. Though a common issue, discrepancies like this are typically corrected by the next billing cycle.

2. Working under a discrepancy between projected costs and actual costs

With any construction project, there are constant fluctuations across many cost inputs. It’s important for your project managers to update estimated costs so they reflect these changes. Otherwise, you’ll be left covering the difference.

3. Completing work that’s not approved

Most every project has its share of change orders, some incidental, others monumental. To make sure things don’t go sideways on pay day, you must document the changes and gain approval before performing any work.

So You’ve Underbilled – Now What?

The sky won’t fall if you underbill—at least, at first. In fact, on the job site everything will likely perform as always.

But from the perspective of your Accountant or bookkeeper, your performance could look completely different: Your cash flow could be in the negative, making it difficult to cover payroll and other expenses. You’ll also be leaving additional revenue on the table when it could’ve been used to cover expenses or added to your cash on hand.

And most importantly, your company’s uneven financial statements will make you a less attractive candidate when you need financial support to bid on larger projects.

Percentage of Completion Accounting: What It Is and Why You Should Use It

Finding an answer to your underbilling woes could start with switching to an accounting model that gives you a more accurate view of progress on a project. That’s where percentage of completion accounting comes in.

The percentage of completion accounting model incorporates milestones into the life of a project. For example, after the dirt work and utilities have been completed, after the foundation and first-floor framing are finished, and so on.

At each of these points, your Accountant can more accurately recognize the revenue, expenses, and gross profit that your company has earned, then submit invoices based on those numbers.

Depending on the nature of the project, you can measure the percentage of completion using one of the following three methods:

1. Comparing the cost incurred against the total estimated cost
2. Comparing the amount of work in hours or material quantities expended against the estimated total
3. Comparing the percentage of units delivered against the total number of units that you’ve committed to

How to Measure Your Progress

To measure the progress on a project, you need to build a work in progress (WIP) schedule. A WIP schedule compares the project’s estimated costs against costs incurred and the percentage of a project complete. It also compares the estimated revenue against earned revenue and total billings.

Adding these variables into your WIP schedule will give you a clear picture of what percentage of that project has been completed, your earned revenue to date, and whether you’re underbilling or overbilling for that project. You can also combine the WIP schedules for each project in motion so you can see your company’s overall financial performance.

Better Business Processes: The Key to Accurate Billing

Using a WIP schedule and percentage of completion accounting can help improve your cash flow. To build a solid financial footing, and eliminate the risk of over/under billing you must improve your business management practices:

• Keep accurate, detailed financial records.
• Accurately estimate and adjust project costs.
• Control expenses.
• Send preliminary payment notices and use progress billings when possible.
• Use a work in progress schedule.
• Prevent unapproved change orders by documenting everything in writing.

With QuickBooks Online as your financial and business management hub, you have an easy-to-use solution that will grow with your business, allowing you to address issues like overbilling or underbilling fast.

Learn how QuickBooks is helping construction companies accurately account for project costs.