Cash flow is crucial to the construction industry. Jobs can’t be completed without purchasing materials and paying for manpower. Contractors use billings in excess to control expenses and reduce their reliance on credit to pay for upfront costs. Billings in excess requires contractors to monitor their financials including each balance sheet, income statement, estimated costs and costs incurred to avoid underbilling and overbilling.
What is Billings in Excess?
“Billings in excess” is a financial term used in the construction industry to refer to the dollar value charged to customers in excess of costs and profits earned to date, according to Businesscon.org. Many contractors bill customers before the job is complete to cover costs. Billings in excess is the amount a contractor owes to a customer for what’s left to complete on a project. When underbilled, billings in excess is work that’s already completed but not yet billed. When overbilled, billings in excess also refers work that has not been completed but for which an invoice was already sent to the client.
There are several accounting methods used in construction, like the direct method and completed contract. Billings in excess is always used with the “percentage of completion” accounting method. This method transfers value to the income statement and costs as the contract proceeds throughout its timeline. The percentage of completion method is often used with long-term construction projects (those that last longer than a year) and for contractors who earn more than $10 million per year in revenue. Keep in mind, billings in excess does not factor in whether a customer has paid, only that they have been invoiced.
Dangers of Overbilling & Underbilling
Billings in excess must be monitored, otherwise overbilling and underbilling could pose dangers to a company’s financial stability.
- Large underbillings can point to slow billing practices, unapproved change orders in the original contract and inaccurate estimates about the costs needed to complete a project. Large underbillings can cause financial backers (banks, investors, etc.) to withdraw their support for a project or a company.
- Large overbillings, where a job is billed heavily in the early stages or advanced payments are made, can lead to instances where the estimated cash needed to complete the project exceeds the amount that can still be billed prior to completion. The excess amount is called “Job Borrow” leading to negative cash flow for the remainder of the job. Large overbilling amounts must be offset on the asset side of the balance sheet by cash and receivables.
Contractors and accountants must be able to calculate billings in excess’s value, report the amount and control its financial impact, according to Businesscon.org.
Tips for Keeping Your Financials in Order
Keeping reports and schedules well organized helps maintain financial control, subsequently improving profit margins.
Maintain Accurate Balance Sheets
A balance sheet reports a company’s assets, liabilities and its shareholders’ equity at a specific point in time. It is essentially a snapshot of what a company owns and owes. Balance sheets are used alongside income statements. An income statement shows profit and losses by listing revenues, costs and expenses over a fiscal quarter or year. It shows whether your company is operating according to your plan. If a balance sheet is inaccurate, not only will your income statement will be wrong, but likely so will the rest of your financial statements.
Better Estimate Project Costs
One project is never the same as another, so generalizing costs won’t work. But that doesn’t mean looking at past job and task completion times shouldn’t be part of your projection process. To provide more accurate estimates, identify the job-specific factors that affect productivity (weather, site access, worker experience levels) and work to eliminate or reduce their effects as you build your estimate. Add each task that needs completing to the work breakdown structure to avoid omitting steps in the construction process. And keep everyone on the same page in regards to plans and specs. Taking the time required to make an accurate estimate will help eliminate unforeseen costs that could lead to excess over billing.
Get Change Orders in Writing
Change orders are common in construction contracts, particularly for subcontractors, who are usually responsible for taking on the bulk of project expenses. Always have additional work, and compensation for that work, put in writing and formally approved. While a verbal agreement to changes on a project may seem fitting, you won’t be able to safeguard your company’s financial livelihood without having something in writing.
Send Preliminary Notices for Payments
Late payments can seriously affect cash flow. Sending a preliminary notice or NTO (Notice to Owner) lets clients know you reserve the right to file a mechanic’s lien in the event of nonpayment. This will put your payment at the top of the pile for the client, general contractor or other entity that’s withholding cash from you.
Keep Detailed Records
The correct documentation, numbers and figures in your invoices can help expedite the application for the payment process. Inaccurate invoices will only delay payment, reducing your cash flow. If an item is missing altogether, illegible or inaccurate, it gives clients and customers leverage to withhold compensation from you. By keeping detailed records and airtight invoices, you can help decrease the chances your cash flow runs dry.
Control Your Expenses
Accurately bidding on projects, cutting back on overtime hours, avoiding overstaffing project and paying only for hours worked helps manage your business expenses and controls cash flow. Ridding your company of inefficient and inaccurate process, like paper time cards and excess overtime, can save both time and money. The solution is to use technology to streamline your manual or error-prone processes. From time tracking, like ExakTime’s Web Based Employee Time Clock Software, to bidding to HR software, using technology will help you to automate slower-moving processes and become more aware of your actual expenses, allowing you to “shave off the fat” where necessary.
ExakTime’s solutions recognize the financial challenges that come with owning and operating a construction company. Our web-based time tracking and scheduling solutions give you the ability to capture workers’ accurate clock-in and out time so you can manage labor costs in real time. Power reporting tools that can be used to create more than 40 robust customizable reports allow you to make informed business decisions on the go. Contact our team to see how improving your payroll processes can help you manage your projects and improve your cash flow.