WIP over and under billing for builders
What it means when billing gets ahead of the work.
Short answer: Over billing means a builder has billed more on a house than it has earned based on percent complete, so cash came in ahead of the work. Under billing means more work was done than billed. On a WIP schedule, the gap is billed to date minus earned revenue, and earned revenue is contract price times percent complete.
The calculation
- Percent complete = cost to date divided by estimated total cost
- Earned revenue = contract price times percent complete
- Over or under billing = billed to date minus earned revenue
What to do
- Over billed: protect that cash for the rest of the house
- Under billed: bill the work or approved change orders
- Either way: check the estimated total cost is current
More detail
See our WIP schedule guide with an illustrative example.
Sources
- 26 U.S. Code ยง 460, long-term contracts (Cornell LII)
- FASB, ASC Topic 606, Revenue from Contracts with Customers
Common questions
Is over billing bad?
Not by itself, but the cash is needed to finish the house.
Do lenders look at this?
Many lenders and sureties ask for a WIP schedule.
Does this set my tax method?
No. Tax methods for home construction have their own rules. Ask your CPA.
Related
By John Mos, Founder. Updated . We do not give tax or legal advice. Please ask your CPA or attorney.
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