Double check those underbillings

Yes, underbillings result in more revenue and assets. But you have to make sure they're reasonable. Otherwise, they're a ticking time bomb.

It's important to understand the mechanics of underbillings before you record what the WIP says. It's not free money. It's a placeholder until your billings catch up. Make sure there will be enough revenue to absorb the reversal in the following year or period.

Example time!

Assume the following facts:

Year 2025:

Total Contract Amount: $6,800,000

Total Estimated Cost: $4,250,000

Gross Profit: $2,550,000

Billings to Date (including retainage): $2,000,000

Cost to Date: $1,700,000

Year 2025: We're working on the 12/31/25 Work In Progress (WIP) schedule and we have one project in progress, Job #1. According to your estimates, gross profit is 38% (see Exhibit #1 year 2025). With these estimates, we have an underbilling of $720,000. With our billings to date of $2,000,000 and WIP adjustment of $720,000, we're recognizing $2,720,000 in revenue and a total of $1,020,000 in gross profit (See Exhibit #2 year 2025).

We took your billings and added an additional $720,000 to it. That's a sizeable adjustment. Before you get too excited, you should understand what that means in future periods.

Fast forward to 2026!

Year 2026:

Job #1 is Completed. Inception to date numbers are as follows:

Total Contract Amount: $6,800,000

Total Cost: $6,200,000

Total Gross Profit: $600,000

Woah, what happened? You estimated $2,550,000 in gross profit and you ended up at $600,000. Big difference! The facts start to unravel. You either knew or had some idea that the project wouldn't make $2,550,000 in profit, you just didn't update the estimates. So now what happens? Job #1 is complete, so there's no WIP (underbilling). We have to zero the underbilling balance and record the offset (decrease) to revenue. Debit Revenue Over/Under and Credit Underbillings. You billed $4,800,000 in 2026 and incurred costs of $4,500,000, but your gross profit (loss) is $(420,000) (See Exhibit #2 year 2026).

The reversal of 2025's underbilling of $720,000 results in a loss. You thought you were doing great profit wise but you ended up with a loss because you didn't double check your underbillings in 2025. This could significantly impact your bonding capacity or year end evaluation by the underwriters.

Now the question is, what could've been done differently to prevent this? Stay tuned!

Exhibit #1:

Exhibit #2:

Thanks!

Ara