What Are Costs in Excess of Billings?
What Are Costs in Excess of Billings?
Costs in excess of billings happen when you’ve spent more on a project (materials, labor, etc.) than you’ve billed your client. In accounting, it shows up as an asset because it’s money you’re expecting to recover soon!
For instance, say you are building a treehouse for a friend. You have already bought the wood and started making the treehouse, but your friend hasn’t paid yet.
Several factors contribute to underbilling in construction, creating a timing gap between incurred costs and invoiced revenue. These discrepancies can impact cash flow and financial stability, making it essential for businesses to monitor their billing cycles closely.
Common Causes of Underbilling
- Progressive Billing Schedules – Many construction projects follow milestone-based billing, where invoices are issued at predefined project stages. However, since costs accumulate continuously, expenses often outpace invoicing, creating a billing lag.
- Upfront and Early-Stage Mobilization – Before physical work begins, contractors and subcontractors incur significant upfront costs, including materials, equipment, permitting, and site mobilization. These expenses build up before the client is ever billed, widening the timing gap.
- Pending Change Orders – When a change order is initiated, related costs often appear weeks or months before final approval and billing. Without diligent tracking, these costs can go unbilled, reducing profitability.
- Project Delays – Construction projects frequently encounter delays, pushing billing milestones further out while expenses continue to rise. This can result in a greater gap between actual costs and billed revenue, leading to cash flow issues.
The Role of CEB in Financial Statements
Costs in Excess of Billings represent the unbilled receivable for revenue that will eventually be collected. Since it reflects future income, CEB is recorded as an asset on financial statements.
Why Monitoring Costs in Excess of Billings?
Regularly tracking CEB helps construction businesses:
- Ensure accurate cash flow forecasting by identifying revenue yet to be billed.
- Prevent revenue loss by keeping up with pending change orders and outstanding invoices.
- Improve financial reporting accuracy by aligning costs with revenue recognition.
- Enhance subcontractor accounting efficiency to maintain better project oversight and reduce underbilling risks.
