{"id":677,"date":"2014-04-02T15:07:30","date_gmt":"2014-04-02T19:07:30","guid":{"rendered":"https:\/\/foundationsoft.com\/?p=677"},"modified":"2025-05-05T09:28:47","modified_gmt":"2025-05-05T13:28:47","slug":"over-under-billing-bonding","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/over-under-billing-bonding\/","title":{"rendered":"Improve Your Financial Game Plan: Game-Saving Plays – Over\/Under Billing and Bonding Reports"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

When the game is on the line, not many coaches would send an inexperienced rookie to the plate. Similarly, project owners today are managing their risks by requiring contractors to obtain bonding.<\/p>\n

As it turns out, bonding can be good for contractors<\/strong>, too. Not only does a surety bond confirm the contractor\u2019s financial credibility, but it may also provide construction owners with a competitive edge when bidding for new jobs.<\/p>\n

But we aren’t just saying that to be cool. According to NASBP, unbonded\/defaulted construction projects were found to have a cost of completion<\/strong> 85% higher<\/a> than projects protected by surety bonds. This means that unbonded projects cost significantly more than surety bonded projects!<\/p>\n\"UG<\/a>\n

So, what\u2019s the key to meeting rigorous surety requirements? It begins with the over\/under billing report<\/strong><\/a>, also referred to as the work in progress (WIP) schedule<\/strong>. As important as these reports are, not every accounting system has the ability to produce them.<\/p>\n

Contractors using generic small business software, for example, must turn to manual methods of data collection and computation, which can take hours, or even weeks, to complete. As a result, these reports are often produced\u2014and perhaps looked at\u2014just once each year, along with financial statements. Without the opportunity to view such reports on a regular basis, many contractors are missing valuable job data that could help them address serious issues throughout the life of a job.<\/p>\n

<\/span>Automate Over\/Under Billing Reports<\/span><\/h3>\n

Fortunately, there are several accounting software<\/a> packages designed specifically to meet the unique needs of the construction industry<\/strong>, namely over\/under-billing reports. Unlike basic accounting packages that do not have the ability to store (or track) original estimates, contract amounts, or change orders to estimates and contracts, sophisticated job cost accounting systems<\/strong> do.<\/p>\n

This enables the contractor to determine a job\u2019s percentage of completion<\/strong>\u2014 the basis for the over\/under billing report.<\/p>\n

Compare the processes needed to produce such reports using a generic accounting system vs. a construction-specific system. Creating over\/under billing reports via generic accounting software would typically require the following steps:<\/p>\n

    \n
  1. Gather numerous system and spreadsheet reports by job, including estimates and change orders, accounts payable reports (sometimes broken down by overhead, materials, and equipment), payroll reports, and billing reports for the period.<\/li>\n
  2. If a job spans multiple years, calculate actual costs in prior years and revenue earned in prior years.<\/li>\n<\/ol>\n

    Despite the benefits, a lot of contractors avoid using purchase orders\/subcontracts<\/strong> because they think the processes are too time-consuming and cumbersome. And that is probably true if an unsophisticated or generic accounting system is being used.<\/p>\n

    Most construction-specific job cost accounting systems<\/strong>, on the other hand, are designed to automate these processes, allowing companies to efficiently track and manage all material, supplies, and subcontractor expenses.<\/p>\n

      \n
    1. Create a spreadsheet and manually enter data, job by job.<\/li>\n
    2. Determine the percent complete for each job.<\/li>\n
    3. Finally, compute the over-billings and under-billings for each job.<\/li>\n<\/ol>\n

      It\u2019s a complicated process, even for the smallest contractor. With a sophisticated job cost accounting system, however, the process might look more like this:<\/p>\n

        \n
      1. Having already entered timesheet data in payroll and all invoices in accounts receivable and having imported a detailed job budget<\/strong>, run an \u201cover\/under billing report\u201d for each job.<\/li>\n<\/ol>\n

        It’s usually that simple.<\/p>\n

        <\/span>Use Over\/Under Billing Reports for Better Job Management<\/span><\/h3>\n

        Better access to reporting almost always leads to better data analysis. Case in point: the over\/under billing report. Instead of waiting until year-end to create over\/under billing reports for financial statements and bonding purposes, financially savvy contractors are using these reports on a regular basis to stay on top of their jobs.<\/p>\n

        Producing such a report on a monthly basis, for example, allows contractors to spot trends and gives them time to make changes when a job is headed for trouble.<\/p>\n

        When reviewing month-to-month over\/under billings, contractors should pay attention to significant fluctuations. Overbilling has its advantages, such as using the owner\u2019s capital instead of the contractor\u2019s, but it can also indicate \u201cjob borrow\u201d\u2014using cash from one job to fund another job. Eventually, that will bring a contractor down.<\/p>\n

        Underbilling, meanwhile, can lead to serious cash flow problems and should, therefore, prompt a thorough review of why incurred costs have not been billed. Are there unprocessed change orders out there? Is there a problem with billing practices? Is the contract owner paying promptly?<\/p>\n

        <\/span>Become a Player in Today’s Competitive Bidding Market<\/span><\/h3>\n

        These days, a contractor\u2019s ability to acquire work is directly dependent on the company\u2019s access to surety bonds<\/strong>. More and more private project owners or their lenders are requiring surety bonds on their construction projects. In some cases, subcontractors with contracts as little as $50,000 are required to obtain bonds. In the public sector, where construction money is most abundant, surety bonds are required by law as a way to protect taxpayer dollars.<\/p>\n

        The over\/underbilling report<\/strong>\u2014a requirement of surety companies\u2014 represents just one piece of the bonding criteria<\/strong> puzzle. Bond producers look at many financial characteristics (such as the strength of the balance sheet, financial statement presentations, history of successful projects, etc.) to determine a contractor\u2019s operating capability. Above all, they want to see a well-managed, profitable enterprise.<\/p>\n

        According to a recently published surety survey, \u201cconstruction companies must continue to pay strict attention to their company\u2019s financial well-being and operating performance to ensure their ability to attain bonding.\u201d<\/p>\n\"Get<\/a>\n

        Many contractors realize having the right accounting software system is essential to attaining bonding status and building a successful company. Generic accounting systems can help companies with basic bookkeeping and accounting tasks, but they don\u2019t provide the reporting that contractors need to understand how each job affects their bottom line.<\/p>\n

        To successfully manage their financial operations\u2014and obtain bonding\u2014 contractors are turning to accounting systems with construction-rich reporting features<\/strong>, like job costing<\/strong>. It\u2019s a win-win solution.<\/p>\n

        *Published in <\/em>Construction Business Owner<\/p>\n","protected":false},"excerpt":{"rendered":"

        When the game is on the line, not many coaches would send an inexperienced rookie to the plate. Similarly, project owners today are managing their risks by requiring that contractors obtain bonding. As it turns out, bonding can be good for contractors, too. Not only does a surety bond confirm the contractor\u2019s financial credibility, it may also provide construction owners with a competitive edge when bidding for new jobs.<\/p>\n","protected":false},"author":17,"featured_media":1492,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[9],"tags":[11],"class_list":["post-677","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","tag-construction-reporting"],"acf":[],"yoast_head":"\nOver\/Under Billing &WIP Reports - Essential Tools for Better Bonding<\/title>\n<meta name=\"description\" content=\"Learn how WIP reporting directly impacts your bonding capacity, prevents cash flow problems, and strengthens surety relationships. 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