Underbilling in the construction industry
happens all the time. Knowing what underbilling is and how it can
affect construction projects and payments is extremely important. In this video, we want to explain to you what
underbilling is and bad practices that lead to underbilling.  Underbilling occurs when a contractor completes
a certain amount of work on a project during a billing cycle, but doesn’t bill their
customers for all of the work completed during the billing cycle. For example, if a contractor completes 30%
of a project, but submits a progress bill to their customers for just 20% of the overall
contract value, the contractor has underbilled by 10%. Why would a contractor not bill for all the
work that they have done? Some of the bad practices that lead to underbilling
include:  •    Slow billing practices 

• underestimating project costs
 • unrecognized overbilling at the beginning
of a project and underbilling towards the end

• weak project management control
 • And unapproved change orders.
 Let’s talk about all of these in more depth.  Slow billing practices happen, for example,
when a contractor is supposed to get their progress bills to the customers on the 1st
of every month, but doesn’t get to it until the 10th. That leaves 9 days of work and costs off of
the invoice and effectively underbills customers for work performed on the date of that invoice. Underbilling caused by slow billing practices
should only have a negative impact on cash flow that’s temporary. However, certain types of underbilling situations
turn into unrecoverable losses.  Poorly estimating project costs can lead to
under billing a job, too. For example, you might think you only need
a crew of 4 laborers and budget accordingly. In reality, if it takes 6 workers to get the
job done on time, there may not be room in the budget for those additional workers. If you eat the cost and only bill for 4 laborers,
you’ve just underbilled.   Unrecognized overbilling at the beginning
of a project can lead to underbilling towards the end of the job, too. Some businesses intentionally front load their
invoices – which we do NOT recommend – and others may do it accidentally. Either way, if too much of the budget is allocated
to the beginning of the project, a contractor may find themselves underbilling at the end
in order to stay “on budget”. Next, let’s talk about weak project management
control. This term refers to costs for non billable
work. An example of this is using materials from
existing inventory but not including those materials in the invoices. Or,  pulling labor off of one project and
putting it on another without considering additional labor cost. It might not result in direct underbilling,
but the net effect is similar. Not all of the labor or materials put into
the job are being billed. Finally, we have unapproved change orders. This isn’t really “underbilling”, per
se, but it can have a similar effect. A change order is work that is added to or
deleted from the original contract. Examples could be a change in the materials
used, adding more electrical lines, or changing floor plans to accommodate unexpected project
needs. If a change order is not approved but the
contractor still spends the money and performs the work, the customer might refuse to pay
for that work. The result may effectively be a permanent,
unrecoverable underbilling. By performing under unapproved change orders,
you may be doing “extra work” which you won’t be paid for. In any event,  the best thing to do here
is to get your change orders approved early and often.  Underbilling is almost never a good thing
and at the highest level, indicates that a construction company lacks financial control
and accounting effectiveness. Also, it usually isn’t good for the project
cash flow. When a contractor is underbilling customers,
they are spending money on projects costs, but are not getting the same amount of money
back from their customers. This leads to a negative cash flow for as
long as the underbilling lasts. If you’re experiencing cash flow issues,
reach out to our payment experts by phone or live chat on levelset.com. And remember, Payment Help is here! 

What is underbilling in construction? [Avoiding cash flow issues 2019]

Leave a Reply

Your email address will not be published. Required fields are marked *