The Cash in Your Account Might Be a Loan From a Job You Haven't Finished
Your bank balance is the most reassuring number you look at, and it is the one number on your whole operation that tells you the least about whether you are winning.
There is a specific reason for that in construction, and it has a name. Some of the money in that account is not yours yet. It is work you have billed and not performed. In a healthy company that is fine and even deliberate. In a company that is quietly failing, it is the last thing to look good before everything stops.
What overbilling actually is
Every job you run has two clocks going at once: the work you have completed, and the money you have billed for it. They almost never match, and the gap has a name in either direction.
When you have performed more work than you have billed, the difference is an underbilling, a contract asset. That is the one I wrote about earlier this month, and it drains your cash because you are financing the job out of your own pocket.
When you have billed more than you have performed, the difference is an overbilling, a contract liability. Under ASC 606 it appears on your balance sheet as exactly that, a liability, because it is an obligation to deliver work you have already been paid for.
Read that again, because the balance sheet is telling you something your bank statement will not. Overbilled cash is a liability. It sits in your checking account looking identical to every other dollar, and accounting has already classified it as something you owe.
Why restoration overbills more than most trades
This is not a criticism of how you bill. Front-loading is a rational response to the position restoration puts you in.
You mobilize immediately, often within hours. You put equipment on the floor and crews on the site before anyone has approved a scope. The carrier pays actual cash value first and holds recoverable depreciation until you document completion. A mortgage company releases rebuild funds in draws. Every one of those facts pushes your costs earlier and your collections later.
So you bill what you can, when you can. Emergency services invoice on day one. You bill the approved scope promptly on approval rather than waiting for the job to finish. That is good practice and I would tell any restoration owner to do it.
The consequence is that a busy restoration company usually carries a real overbilled position, and the busier it gets the larger that position grows. Which means the cash cushion looks best exactly when the most unperformed work is sitting behind it.
Overbilling is a billing position, not a profit. It reverses. Every dollar of it has to be earned by doing the work, and the work still costs what it costs.
The failure this sets up
Here is how it goes wrong, and it is slow enough that nobody notices the year it starts.
A job runs over. Discovered scope you never supplemented, a subcontractor who came in high, three weeks of schedule you ate. The job is going to close below the margin you booked, maybe below zero. That is a real loss, and it will show up in cash when the job closes.
But it does not show up today, because today you have new jobs mobilizing and billing. Their overbilled cash covers the overrun on the old job. Payroll clears. Nothing feels wrong.
That is job borrowing. You are funding a completed loss with money owed to work that is not done yet, and you have to keep the volume up to keep doing it, which means bidding faster and looking harder at the top line than at the margin. The contractor who fails this way is almost never short of work. That is the tell. They are short of finished, collected, profitable work, and the volume is what is hiding it.
The test, and you can run it this month
You need two numbers side by side, and you need them month over month rather than as a snapshot.
One: your total overbilled position, from the work-in-progress schedule. Sum the billings-in-excess column across all open jobs.
Two: the gross margin on jobs that closed this month, compared with the margin you booked on those same jobs when they were open.
Then look at the direction of travel. If your overbilled position is growing while the margin on closed jobs is falling, you are borrowing. Not metaphorically. The growing liability is funding the shrinking profit, and the arithmetic only works while new work keeps arriving.
If the overbilled position is growing and closed-job margins are holding, you are simply busy and billing well. Same balance sheet, completely different company. One number cannot tell you which one you are. The pair can.
Four things to put in place
1. Produce a WIP schedule monthly, not at year end. Contract value, costs to date, estimated total costs, percent complete, revenue earned, billings to date, and the over or under position on every open job. Annual WIP is a compliance document. Monthly WIP is a management report, and it is the only place job borrowing is visible.
2. Compare booked margin to closed margin on every job. The gap between what you thought the job would make and what it made is the number that predicts next year. Track it by job type and by estimator.
3. Treat the overbilled position as a liability in your cash forecast. Not as a balance you can spend. If you are forecasting thirteen weeks of cash, the unperformed work behind that cash has costs attached to it, and those costs land inside the forecast window.
4. Fix the overrun rather than financing it. A job running over is a supplement conversation, a scope conversation, or an estimating problem. Covering it with billing timing is the one response that changes nothing and buys you a bigger version of the same problem next quarter.
The point
Underbilling and overbilling are the same instrument read in opposite directions. Underbilling tells you your cash is being consumed by work you have not billed. Overbilling tells you your cash includes work you have not done. Neither is visible on a bank statement, both are visible on a WIP schedule, and the WIP schedule is the report most restoration companies produce once a year for someone else.
A contractor who reads their WIP monthly knows which of their jobs is paying for which. That is a bookkeeping and job costing discipline, not a financial instinct, and it is most of what we put in place for restoration companies. Our CFO subscription exists to make that report exist and get read. Get in touch if yours does not.
General guidance for restoration and reconstruction owners, not a substitute for accounting advice tailored to your company's contracts and numbers.
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Sources: FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, on contract assets and contract liabilities: an entity presents a contract liability when it has received consideration, or has an unconditional right to consideration, before transferring the promised goods or services. The construction terms "costs and estimated earnings in excess of billings" (underbilling, a contract asset) and "billings in excess of costs and estimated earnings" (overbilling, a contract liability) describe the same positions in the vocabulary of the work-in-progress schedule. The description of job borrowing, the two-number test, and the four recommended practices are practice and opinion drawn from construction and restoration accounting, not findings from a study.