Overbilling in Construction: What It Is and How to Manage It

By

Josh Krissansen

Last Updated Feb 4, 2026

By

Josh Krissansen

Does the billing actually reflect the work completed?

That question isn’t always asked during a smooth progress claim. It usually comes up when certification tightens, a client challenges a payment schedule, or a financier reviews work-in-progress (WIP) as part of a drawdown or year-end close.

When that happens, the difference between what has been invoiced and what has actually been delivered becomes clear — and that difference is known as overbilling.

When overbilling isn’t clearly understood or actively monitored, the impact extends beyond a single project:

• Margins can be overstated
• Liabilities can accumulate quietly on the balance sheet
• Commercial discussions can be difficult to defend as scrutiny intensifies.

This article explains how overbilling occurs in construction, where it poses the greatest financial and contractual risk, and how it can be managed without compromising cash flow control, reporting accuracy, or stakeholder confidence.

What Is Overbilling in Construction?

Overbilling happens when a contractor bills more than the revenue earned based on actual project progress at a given point in time.

Under percentage-of-completion accounting, earned revenue is tied to the work performed, rather than the timing of invoices or progress claims. So when billings exceed earned revenue, the difference becomes a liability on the balance sheet. Commonly shown as billings in excess of costs, this amount represents the value the contractor has been paid for but has not yet delivered.

Overbilling is a common cash-flow practice in commercial construction and is often used to fund mobilisation, preliminaries, and early project costs. It remains within contractual terms and does not involve charging beyond the agreed scope or rates. That distinction matters: 

• Overcharging occurs when a contractor bills outside the contract
• Overbilling reflects a timing difference between revenue recognition and cash received. 

The commercial risk lies not in whether overbilling occurs, but in whether billing positions are actively monitored and aligned with earned revenue.

How to Calculate Overbilling with Percentage-of-Completion

Overbilling is calculated by comparing the revenue earned based on actual project progress against total progress claims submitted. Australian commercial contractors manage this through work-in-progress reporting to maintain accuracy across financial statements and cash flow forecasts.

The percentage-of-completion method ties revenue recognition to the work performed rather than to cash received. This is a requirement for compliant WIP reporting, ensuring that billing positions accurately reflect actual financial performance.

The core industry formula used throughout the sector is:

Overbilling = Total billings to date - Earned revenue to date

Step 1: Determine Contract Amount and Cost Estimates

Start by confirming the total contract value, including all approved variations. Accurate earned revenue cannot be calculated if contract values are incomplete or outdated.

Next, establish the total estimated cost to complete the project. This must include both direct and indirect costs:

• Direct costs such as labour, materials, plant, and subcontractors
• Indirect costs such as preliminaries, site overheads, and allocated project overheads
  

Estimates must be current and reflect all approved scope changes. Any inaccuracy at this stage flows through every progress claim and distorts the reported WIP position.

Step 2: Calculate Percentage-of-Completion

Apply the cost-to-cost method, which is the standard approach for Australian commercial construction projects.

Under this method, the percentage-of-completion is calculated by dividing costs incurred to date by total estimated costs. This percentage represents financial completion, not physical progress, and drives how much revenue can be realised.

Say a project has a total contract value of $1,000,000 and an estimated total cost of $800,000. If expenses incurred to date total $400,000, the project is 50% complete from a financial perspective. This percentage determines the portion of the contract value that can be recognised as earned revenue at that time.

Alternative methods, such as units installed or labour hours, may be used for discrete scopes, but they are less common for enterprise-level WIP reporting and portfolio consolidation.

Step 3: Calculate Earned Revenue and Compare to Billings

To calculate earned revenue, multiply the percentage complete by the total contract value.

In the example, a project that is 50% complete on a $1,000,000 contract has an earned revenue of $500,000.

This earned revenue is then compared to total progress claims submitted to date. If the contractor has submitted $600,000 in progress claims, billings exceed earned revenue by $100,000.

That $100,000 represents an overbilling position. It is recorded as a current liability on the balance sheet. If billings were below $500,000, the difference would represent underbilling and be recorded as a current asset.

Accurate comparison at this stage is critical. Errors result in overstated income, misstated liabilities, and a distorted view of actual project performance.

Common Causes of Overbilling on Construction Projects

Overbilling most often stems from timing differences and estimation assumptions, rather than deliberate overcharging. These conditions arise when billing advances faster than cost recognition or contractual scope formalisation.

Identifying the underlying causes early allows contractors to correct billing positions before they escalate into disputes, financial misstatements, or loss of stakeholder confidence.

• Advance Billing for Mobilisation and Preliminaries

  Contractors commonly bill mobilisation and preliminaries early to fund site establishment. These costs often include site sheds, fencing, temporary services, bonds, insurance, and plant mobilisation.
  
  Early billing supports cash flow but often leaves the project overbilled until site costs are incurred and recognised. The overbilling resolves only as on-site activity catches up with the billing profile.

• Unrecognised Cost Savings Against Original Estimates

  Overbilling can occur when actual costs are lower than forecasted costs, but the estimates are not updated in WIP.
  
  Efficiency gains in labour, materials, or procurement reduce actual spend. If billing continues against the original estimate, earned revenue calculations lag behind billing. The overbilled position persists until the estimated cost to complete is revised to reflect current conditions.

• Billing for Unapproved Variations

  Invoicing for variation work before formal approval creates a disconnect between billings and contract value.
  
  Variation work may be physically complete but not contractually recognised. Until the variation is approved and added to the contract sum, billed amounts exceed documented earned revenue.

• Missing Accruals and Timing Gaps

  Overbilling often arises from timing gaps between progress claims and the recognition of costs.
  
  Head contractors may bill for subcontractor work once it is complete on-site. If subcontractor claims have not yet been received or accrued, costs are temporarily understated. This creates an overbilled position driven by accounting lag rather than actual project performance.

• Conservatively High Initial Cost Estimates

  Early project budgets often include conservative allowances and risk buffers.
  
  When contingencies are not required, actual costs fall below the original estimate. Percentage-of-completion calculations based on inflated estimates misrepresent earned revenue. Billing then runs ahead of actual cost progression until estimates are correcte

• High Margins Loaded Into Early Schedule of Values Items

  Some schedules of values allocate higher margins to early activities such as demolition, groundworks, or initial trade packages.
  
  When these items are completed early, billings can exceed incurred costs by a significant amount. The project remains overbilled until lower margin work is delivered later in the programme and margins normalise across the contract.

Risks and Benefits of Overbilling for Contractors

Overbilling’s effectiveness depends on consistent tracking, transparent disclosure, and strict alignment with contract terms.

Contractors must balance short-term liquidity advantages against longer-term financial, contractual, and portfolio-level construction risk.

Benefits of Overbilling

Improved Cash Flow During High-Cost Project Phases

Overbilling provides early access to cash when project outflows peak during mobilisation and site establishment. This liquidity supports delivery during the most cost-intensive stages of the programme.

Key benefits include:

• Funding mobilisation, preliminaries, and early procurement without internal cash strain
• Reducing the need to finance upfront costs out of pocket
• Maintaining continuity of site operations during high spend phases

Reduced Reliance on External Financing

When managed within contractual limits, overbilling can function as short-term, interest-free funding provided by the client.

This reduces reliance on external funding by:

• Limiting dependence on overdrafts, loans, or shareholder injections
• Improving liquidity without increasing debt exposure
• Preserving borrowing capacity for higher risk or unexpected events

Buffer Against Payment Delays and Administrative Lags

Overbilling can also provide a buffer against common delays in the payment cycle.

In practice, this helps contractors:

• Absorb slow progress claim approvals
• Manage delays caused by variation assessment or certification
• Avoid operational disruption when payments are deferred

Risks of Overbilling

Financial Misrepresentation and Reporting Risk

Without active governance, overbilling can significantly distort a project's financial position.

Common reporting risks include:

• Missing accruals that understate true costs
• Outdated estimates that conceal emerging overruns
• Inaccurate WIP positions that increase audit, lender, and surety scrutiny

Client Trust Erosion and Contractual Disputes

Owners and quantity surveyors closely track the relationship between billing and progress.

When billing runs ahead of delivery, it can result in:

• Breaches of contract provisions tied to progress or milestones
• Increased challenge of progress claims
• Reduced confidence in reported project performance

Job Borrow and Portfolio Level Risk

Overbilled cash is often redeployed to support other projects.

This creates portfolio exposure when:

• Costs accelerate on the original job
• Progress slows, or claims are withheld
• Liquidity pressure escalates across multiple projects simultaneously

Profit Fade and End Of Project Cash Pressure

Overbilling unwinds as projects approach completion.

As this occurs:

• Incoming revenue reduces in the later stages
• Cash inflows tighten during defects and closeout
• Contractors face pressure if surplus cash has already been consumed

How Overbilling Affects Financial Statements and Work-in-Progress

Overbilling creates a gap between the cash received and the revenue earned, which must be corrected through work-in-progress reporting. Financial statements must reflect actual project progress, not billing activity.

When overbilling is poorly managed, it distorts profitability, liquidity, and balance sheet position. The impact is reflected in all three core financial statements.

Balance Sheet Impact: Billings In Excess Of Costs

Overbilling is recorded on the balance sheet as a current liability titled Billings in Excess of Costs.

This liability represents work that has been claimed but not yet performed. Until the job is completed, the contractor holds the client's funds for future execution rather than as earned income.

WIP adjustments ensure overbilled amounts are not treated as equity or profit. Without this correction, balance sheet positions can appear stronger than they actually are and mask underlying delivery risk.

Income Statement Impact: Revenue Recognition Under Percentage-of-Completion

Revenue is recognised based on earned progress, not on progress claims submitted.

When a project is overbilled, revenue must be reduced through WIP adjustments to align income with actual completion. This prevents artificial inflation of revenue and margin during the reporting period.

Income statements aligned to WIP provide an accurate view of project performance, allowing management to identify margin erosion, cost overruns, and delivery risk before they are locked in.

Cash Flow Statement Impact: Short-Term Operating Cash Inflow

Overbilling increases operating cash flow in the short term.

Client funds received ahead of earned revenue are commonly used to finance mobilisation, preliminaries, and early project costs. While this improves liquidity, it does not indicate profitability.

Cash timing must be assessed separately from earned revenue. Strong operating cash flow, driven by overbilling, can coexist with declining margins or emerging cost pressures.

Overbilling vs Underbilling and the Right Balance

Overbilling and underbilling represent opposite positions between earned revenue and the amounts invoiced. 

Underbilling occurs when a contractor invoices less than the actual value of the work performed.

From an accounting perspective, this appears as costs in excess of billings and is recorded as a current asset on the balance sheet. The contractor has delivered work but has not yet recovered the associated cash, increasing working capital pressure.

Overbilling and underbilling can both occur during a project. Front-end billing may support early cash flow, but billing positions must balance over the life of the project as costs are recognised and work is delivered.

The optimal billing position shifts across the project lifecycle and depends on commercial terms, financial capacity, and client relationships.

Cash Flow Implications Of Each Billing Position

Overbilling and underbilling affect liquidity, risk exposure, and delivery obligations in different ways.

When a project is overbilled, the contractor benefits from short-term working capital support. In this position:

• The client effectively finances part of the project
• Cash is available to fund early costs
• Future delivery obligations increase as costs catch up to billings
• Tight tracking is required to avoid profit fade
  

When a project is underbilled, the contractor carries the financing burden. In this position:

• Internal cash is used to fund labour, materials, and overhead
• The client retains cash until later stages
• Working capital pressure increases
• Underbilling may be used deliberately to protect leverage at closeout

Key Considerations When Managing Billing Position

Several factors should inform whether a project leans toward overbilling or underbilling at any point in time.

Contract Terms

Contract terms define how much flexibility exists in billing strategy.

Some contracts permit advance payments, front-loaded schedules, or milestone-based claims. Others strictly limit billing to measured physical progress. Billing outside these parameters increases the risk of disputes and exposes the contractor to compliance challenges.

Billing position should always be tested against contractual entitlement, not just cash needs.

Client Relationship

Client maturity and trust level directly affect billing tolerance.

Established clients may accept controlled overbilling when it is transparent and well supported. New, price-sensitive, or highly regulated clients typically expect conservative billing that is closely aligned with progress.

As trust erodes, claim scrutiny increases, and payment cycles slow.

Project Phase

The billing strategy should shift as the project progresses through its lifecycle.

Mobilisation and early procurement phases often justify controlled overbilling. Construction execution phases require tighter alignment between progress and billing. The closeout and defects phases commonly transition into underbilling to protect final payment and leverage completion.

Static billing strategies rarely hold across all phases.

Company Cash Position

Organisational liquidity determines how much underbilling a contractor can absorb.

Firms with substantial cash reserves can tolerate underbilling without operational impact. Cash-constrained businesses often rely more heavily on early overbilling, which increases their exposure if progress slows or costs accelerate.

Project-level billing decisions should align with portfolio wide cash planning.

Bonding And Lending Covenants

External stakeholders closely monitor billing behaviour.

Sureties and lenders track overbilling ratios as indicators of financial discipline. Excessive or persistent imbalance can raise concerns about governance, margin quality, and liquidity management.

In extreme cases, covenant pressure can restrict bonding capacity or access to finance.

Ways to Reduce Overbilling Disputes and Improve Cash Flow

Most overbilling disputes originate from process gaps between field progress, cost recognition, and billing. Payment delays, weak cost control, and scheduling breakdowns are consistently cited as leading contributors to construction disputes and billing misalignment.

Reducing disputes does not require conservative billing. It requires consistent controls across project, commercial, and finance teams, supported by clear documentation and disciplined timing.

Establish Transparent Billing Schedules

Billing disputes often arise from schedules of values that do not accurately reflect how work is actually delivered on-site. When line items are poorly aligned to measurable outputs or project milestones, progress becomes subjective and difficult to certify.

Schedules of values should be structured so that each line item corresponds to a clearly observable work item or a defined milestone. Front-loading values that cannot be substantiated by physical progress should be avoided, as this invites challenge even when billing is contractually permitted.

As the scope evolves, schedules must be updated promptly to reflect approved variations rather than relying on informal adjustments.

Early communication also matters. Aligning billing structure and expectations with owners and certifiers at the outset reduces ambiguity and limits interpretive disputes later in the project.

Implement Formal Variation Governance

Variation-related disputes often arise when billing occurs before contractual recognition, rather than upon physical delivery.

Formal governance requires discipline. Variation work should not be included in progress claims until it has been approved in writing and incorporated into the contract sum. Subcontractor claims tied to variation work must also be directly mapped to approved head contract changes, rather than being informally absorbed into progress claims.

Maintaining a clear audit trail from scope change through approval and billing ensures both cash flow and entitlement are protected. Without this structure, contractors risk funding work that is complete on site but invisible contractually.

Conduct Monthly Accrual Reviews Before Billing

Artificial overbilling is often caused by accounting lag rather than project performance.

Before issuing progress claims, the costs of known subcontractors and suppliers should be recorded and accrued, even if invoices have not yet been received. Timing gaps between site completion and accounting recognition must be actively reviewed rather than left to resolve themselves in later periods.

This discipline ensures that billing positions reflect true financial progress and prevents overbilling driven by missing or delayed accruals.

Maintain Accurate And Current Job Cost Estimates

Outdated estimates distort percentage-of-completion calculations and inflate earned revenue assumptions.

Estimated costs must be updated as project conditions change. Efficiency gains, delays, scope shifts, and procurement outcomes should all trigger a review of the forecast. The percentage-of-completion method should always reflect the current cost reality rather than the original assumptions carried forward for convenience.

Active estimate management prevents overbilling positions that exist only because cost forecasts no longer reflect how the job is actually performing.

Standardise Progress Documentation

Progress claims are easier to approve and defend when documentation is consistent and directly aligned to the billing structure.

Evidence should be explicitly tied to the schedule of values line items and supported by photos, site diaries, and quantity tracking, where relevant. When documentation aligns with how progress is billed, verification becomes straightforward, and claim challenges are reduced materially.

Consistency matters more than volume. Clear, repeatable evidence builds confidence and accelerates certification.

Integrate Field And Financial Systems

Disconnected systems create reconciliation gaps that often surface as billing disputes.

Integrating project management, job costing, and billing workflows removes reliance on spreadsheet-based reconciliation between teams. When progress, costs, and billings are updated from a single source, manual errors drop, and reported positions become easier to defend.

System integration strengthens confidence in both internal reporting and external claims.

Train Project Teams On Billing Mechanics

Many billing issues originate from disconnects between site reporting and financial requirements.

Project managers need to understand how cost tracking feeds into WIP and revenue recognition. Site reporting practices should align with accounting needs rather than operate in parallel. When teams understand the downstream financial impact of their inputs, accountability improves, and friction reduces.

Shared understanding across project and finance teams materially improves data quality and billing credibility.

Monthly Billing Cycle Control Checklist

This cycle aligns delivery, finance, and commercial teams without restricting cash flow:

Week 1 focuses on progress validation:

• Field teams submit progress updates and photos
• Quantities and completed work are verified against the schedule of values
  

Week 2 focuses on cost accuracy:

• Project managers review job cost reports
• Estimated costs to complete are updated where required
  

Week 3 focuses on financial alignment:

• Accounting reconciles accruals and prepares draft progress claims
• WIP positions are reviewed for overbilling or underbilling
  

Week 4 focuses on governance and submission:

• Senior review of billings versus earned revenue
• Progress claims submitted with supporting documentation

Overbilling in construction requires active governance

Overbilling is a legitimate cash flow tool when it is tracked against earned revenue, controlled through consistent and accurate WIP reporting, and aligned with contract terms.

Contractors that manage overbilling effectively preserve liquidity, protect margin visibility, and reduce dispute risk across their project portfolios.

Written by

Josh Krissansen

53 articles

Josh Krissansen is a freelance writer with two years of experience contributing to Procore's educational library. He specialises in transforming complex construction concepts into clear, actionable insights for professionals in the industry.

View profile