The term overbilling is probably well-known to the construction industry. Overbilling in construction primarily occurs when a contractor bills for contracted labor and materials before that work is actually completed. For example, a contractor has completed only 40% of a project but they bill for 50% of the total contract value. That means their customer pays the overbilled amount of 10%.
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Common Cause of Overbilling
Overbilling in construction frequently stems from miscommunication, human errors, and insufficient project tracking. These factors undermine accurate billing and project relationships.
Miscommunication: Unclear communication leads to misunderstandings, like unrecorded change orders causing double billing.
Human Error: Accounting mistakes distort billing accuracy, even small errors causing significant overbilling and affecting financial reports.
Inadequate Tracking: Incomplete systems cause billing for unfinished tasks or unused materials, impacting financial projections.
Incomplete Documentation: Inaccurate records hinder expense validation, leading to billing disputes and potential overbilling, straining financial relationships.
Real-Life Examples:
Change Orders: Undocumented verbal changes lead to overbilling disputes, impacting financials and trust.
Quantity Error:Incorrect material measurements cause excessive billing, affecting financial statements.
Progress Lapse: Weak tracking triggers billing for incomplete work, distorting financial projections.
The upside of overbilling
In general, some amount of overbilling is very beneficial, because payment in the construction industry is notoriously slow. Therefore, overbilling can be a legitimate strategy contractors use to keep projects going. By billing late-payment clients earlier, constructors can stay ahead of the project cash flow, which allows them to maintain their projects’ timelines and avoid costly time delays.
The downside of overbilling
Although overbilling in construction is acceptable, contractors must be wary of the potential risks. Significant overbilling can become a problem that a contractor can be faced with what is known as “job borrow”. Job borrow occurs when the estimated costs to complete a contract exceed the amount of money remaining on the project still to be billed. This could cause the contractor to have a negative cash flow for the remainder of the job, and have to ‘borrow’ cash flow from some jobs to cover the costs to complete other jobs.
It’s crucial for a contractor to identify potential risks associated with either late payment and ‘job borrow’ to avoid related cash flow difficulties.
Preventing Overbilling
In the world of construction, ensuring accurate billing is a top priority to maintain financial credibility and trust. To avoid overbilling, consider these practical strategies, often guided by human expertise:
Effective Communication: Facilitate open discussions among all stakeholders. Clearly articulate project scope, changes, and agreements to minimize misunderstandings that can lead to overbilling.
Robust Project Management: Utilize advanced project management systems that humans oversee. This ensures meticulous tracking of progress, reducing the likelihood of overbilling due to missed tasks.
Regular Reconciliation: Regularly cross-reference invoices with actual completed work. Human oversight in this process catches discrepancies early, curbing overbilling before it becomes problematic.
Billing Automation with Human Oversight: Embrace billing automation tools while ensuring human supervision. Humans can intervene to correct errors and ensure precise data entry, decreasing the risk of overbilling.
Looking for an Expert construction bookkeeper who knows the construction business? Contact the Irvine Bookkeeping team for the best help. Schedule a FREE consultation to find out how we can help reduce your financial stress by improving your construction cash flow management and invoicing process.
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