Overbillings vs. Under billings
Contractors, or principals, are often curious if sureties prefer over billings or under billings. The answer can change depending on the surety; however, defining the two can better help you understand the underwriter’s potential concerns of both.
Under billings
- Earned revenue that has not been billed
- Appear on a principal’s work on hand report and ties to the balance sheet as a current asset
- Viewed as an asset during financial analysis because the revenue should be collected soon
- Count towards a principal’s working capital because it is determined a current asset.
Extensive under billings could evidence unapproved change orders; the underwriter will want to see some financial capacity to withstand losses that could occur as a result.
Over billings
- Revenue a principal has billed for even though they have not earned it
- Appear on a principal’s work on hand report and ties to the balance sheet as a current liability “billings in excess of costs.”
- Deemed a current liability because the principal has billed for work not yet completed
- A tool to front load costs to help cash flow the technical ‘financing’ of the project. For example, subcontractors will bill excessive mobilization costs during the first month of the project to afford up front labor and material costs.
Extensive over billings could be a sign of job borrowing as a result of a cash flow crunch; the underwriter will want to see the overbilled amounts represented in cash on the balance sheet.
The fact is contractors will always show some overbilling or under billing. Either of these should be avoided to the greatest extent possible. As a contractor it is important to understand that large under billings or over billings will require an explanation, especially if these billings represent a significant percentage of your current assets or current liabilities.
If you want an agent who is familiar with the surety bonding process and who can maximize your surety bond program, then look no further than one of Parrot Surety Services’ Surety Bond Specialists. Parrot is the premier surety agency in the United States for advising and managing all types of surety bonds and bond programs.
Contractors, or principals, are often curious if sureties prefer over billings or under billings. The answer can change depending on the surety; however, defining the two can better help you understand the underwriter’s potential concerns of both.
Under billings
- Earned revenue that has not been billed
- Appear on a principal’s work on hand report and ties to the balance sheet as a current asset
- Viewed as an asset during financial analysis because the revenue should be collected soon
- Count towards a principal’s working capital because it is determined a current asset.
Extensive under billings could evidence unapproved change orders; the underwriter will want to see some financial capacity to withstand losses that could occur as a result.
Over billings
- Revenue a principal has billed for even though they have not earned it
- Appear on a principal’s work on hand report and ties to the balance sheet as a current liability “billings in excess of costs.”
- Deemed a current liability because the principal has billed for work not yet completed
- A tool to front load costs to help cash flow the technical ‘financing’ of the project. For example, subcontractors will bill excessive mobilization costs during the first month of the project to afford up front labor and material costs.
Extensive over billings could be a sign of job borrowing as a result of a cash flow crunch; the underwriter will want to see the overbilled amounts represented in cash on the balance sheet.
The fact is contractors will always show some overbilling or under billing. Either of these should be avoided to the greatest extent possible. As a contractor it is important to understand that large under billings or over billings will require an explanation, especially if these billings represent a significant percentage of your current assets or current liabilities.
If you want an agent who is familiar with the surety bonding process and who can maximize your surety bond program, then look no further than one of Parrot Surety Services’ Surety Bond Specialists. Parrot is the premier surety agency in the United States for advising and managing all types of surety bonds and bond programs.
