Billings In Excess of Costs
Billings in Excess of Costs, also known as overbillings, is an important accounting concept in construction, engineering, and project-based industries. It occurs when a company bills clients more than the revenue actually earned on long-term contracts, creating a timing difference between cost recognition and revenue recognition. Essentially, overbilling arises when cash collected from clients exceeds the expenses incurred and revenue recognized for the project to date. On the balance sheet, overbillings are recorded as a liability until the earned revenue catches up with the billed amounts. While primarily an accounting measure, Billings in Excess of Costs also serves as a strategic financial tool, helping companies manage cash flow, fund ongoing projects, and optimize working capital. Properly tracking overbillings ensures compliance with GAAP or IFRS standards, provides insight into project financial health, and helps avoid potential liquidity or revenue recognition issues.
CAUSES OF OVERBILLINGS
Timing Differences Between Billing and Revenue Recognition – Overbillings often arise when companies invoice clients based on project milestones while the actual costs incurred remain lower than the billed revenue.
Aggressive Billing Practices – Overbilling can result from billing ahead of actual work completion or overstating the percentage of completion in progress-based contracts.
Contract Complexity – Large, multi-phase projects frequently involve complex milestone payment structures, which can cause cash receipts to outpace cost recognition and create temporary overbillings.
Errors in Cost Tracking or Revenue Recognition – Inaccurate project accounting, improper cost allocation, or weak revenue recognition controls can unintentionally inflate overbillings.
Change Orders and Scope Adjustments – When change orders are approved and billed before related costs are fully tracked, temporary overbillings can occur.
HOW TO AVOID OVERBILLING
Implement Accurate Project Accounting Systems – Regular reconciliation of accounts receivable and project costs ensures billing accuracy and reduces the risk of financial misstatements.
Align Billing with Revenue Recognition – Create billing schedules that accurately reflect project progress and comply with GAAP or IFRS guidelines.
Regular Cost Monitoring and Forecasting – Monitor labor, materials, and overhead costs on a weekly or monthly basis. Ongoing forecasting and variance analysis help identify discrepancies early and prevent billings from outpacing actual costs.
Strengthen Internal Controls and Approvals – Establish review and approval processes for invoices, progress claims, and change orders. Require management sign-off before billing work not yet performed or confirmed.
Define Clear Contract Terms – Negotiate and document precise milestone payments and revenue recognition criteria within client contracts. Transparent terms minimize disputes and reduce timing mismatches between billings and performance.
Conduct Periodic Financial Reviews – Perform monthly or quarterly reconciliations of billings, costs, and recognized revenue. Regular financial reviews can uncover emerging overbilling trends, allowing timely adjustments to billing practices.