What to expect when you have high underbillings this year

High underbillings may help your bottom line this year but you should always remember, "what goes up, must come down." The purpose of the underbilling is a temporary patch until your billings or gross profit catches up. So, expect a reversal the following year if the project is complete.

In our example below, we have a project in progress at 12/31/X5 with no billings, just costs of $390,000, resulting in an underbilling of $585,000. You didn't bill anything for the project but thanks to the WIP, you can recognize $585,000 in revenue. Great!

However, keep in mind that when you bill the project in full when the project is completed in 2XX6, that WIP has to come down and zero out. The project is complete, no more costs or billings remain, therefore it is no longer in progress. No WIP! You billed out $1.2M in 2XX6 but not all of that is revenue. Remember, you recognized $585,000 of that in 2XX5, which means that of the $1.2M billed, you will recognize $615,000 in revenue on the project in 2XX6.

You end up crediting underbillings for $585,000 and debiting revenue for the same amount, which would reduce total revenue to $615,000, assuming no other projects.

Thanks!

Ara