The importance of accurate billing on construction projects cannot be overstated. Proper progress payment requests are critical to a contractor’s cash flow and help to maintain trust and transparency with all stakeholders on the job. Unfortunately, some invoicing practices can be troublesome. Whether intentional or otherwise, consistent overbilling is particularly problematic because it can affect the contractor-customer relationship, among the most important personal connections on any construction job. While the customer typically understands that it’s not the contractor’s responsibility to fund the project, transparency concerning billing helps the contractor maintain a solid cash position while remaining in the good graces of their client. Read on to learn more about overbilling and how to avoid any unintended consequences.
In This Article
What is Overbilling in Construction?
Overbilling in construction generally happens when a contractor invoices labor and materials before completion of the actual work, as described in the Schedule of Values (SOV). Most contractors understand the importance of maintaining a cash-neutral or cash-positive position on all projects. In that respect, it’s imperative to charge for upfront costs like mobilization, material purchased and stored onsite, and general conditions per the construction contract. However, overbilling to solve immediate cash flow issues often leads to inadvertent problems later in the project, including payment delays if invoices get flagged for review or otherwise declined. Trades that consistently overbill often find themselves in hot water regarding future finances as well as deteriorating relationships with general contractors and project owners.
Why Does Overbilling in Construction Happen?
More often than not, overbilling in construction is the unintentional result of trades avoiding having to fund jobs out of their own pockets. Good contractors understand the importance of staying cash neutral on jobs and remain aware of their current cash position on every project. They invoice appropriately to avoid falling behind because of underbilling which could lead to cash flow issues.
What Are the Consequences of Overbilling in Construction?
Among the potential issues associated with overbilling in construction is the mistaken belief that invoicing ahead of actual work completion will improve short-term cash flow position. Such practices can backfire, though, putting a contractor’s fiscal health in as much jeopardy as underbilling. Cash is a contractor’s lifeblood, and falling behind is almost always detrimental to a project’s success.
Business relationships can also be adversely affected by the practice of overbilling. Invoicing outside the parameters of the previously agreed upon Schedule of Values runs the risk of destroying the trust between the subcontractor, general contractor, and the project owners. Potential long-term consequences include irreversible harm to these business relationships and the forfeiture of future projects.
How Can You Avoid Overbilling in Construction?
Accurate Invoicing
Accurate invoicing practices are essential to more than just a contractor’s financial health. Avoiding overbilling throughout a project helps ensure that business relationships and reputations remain intact, keeping trust and transparency with all stakeholders. There are several best practices and steps that contractors can take to avoid unintentional overbilling.
Detailed Planning
Detailed planning is essential. An accurate and comprehensive Schedule of Values is critical at the beginning of every project. It provides a breakdown of all work to be performed and the associated values for each step in the project. With a solid SOV, inadvertent billing errors can often be avoided.
Regular Updates
Regular updates are equally important. Construction budgets and related work-in-progress (WIP) reporting should be kept current to reflect project progress and expenses. It’s also essential to double-check actual costs against projected SOV amounts to identify any discrepancies as early as possible. Remember standard construction project billing dates like the 15th and 25th of each month, and always ensure payment requests are made by the General Contractor’s monthly deadlines to avoid falling behind.
Clear and Open Communication with all Stakeholders
Clear and open communication with all stakeholders on the project helps keep everyone up to speed on anything that might impact pricing. If adjustments to the contracted costs are necessary, a consistent and comprehensive change order process is paramount to maintaining transparency. In addition to agreeing with the client on any project changes, all updates must be reflected promptly across the construction contract, corresponding WIP reports, and relevant AIA payment applications.
Resource Management
Finally, contractors are encouraged to take full advantage of all available resources at their disposal. Construction accounting and financial management tools like CrewCost can help track project spending and automatically update budgets and WIP reports. Such features help ensure accurate billing and provide the necessary data to back up progress payment applications.
With an understanding of overbilling in construction and the tools and information necessary to avoid it, contractors can enjoy better profitability and improved communication with clients and managers while ensuring legal compliance throughout the project. Explore a free trial of CrewCost today, stop worrying so much about the numbers, and get back to what you do best: building!
Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.
