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Financial

Underbilling

In Plain English

When a contractor bills for less work than has actually been completed, leaving money on the table.

Definition

Underbilling occurs when a contractor bills less than the value of work actually completed, resulting in costs in excess of billings on the balance sheet. It can result from billing conservatively, being behind on paperwork, or not submitting timely change order billings. While underbilling is not immediately harmful to cash flow (the owner has not paid), it suppresses reported revenue and can mask a project's actual financial health.

Why It Matters in Bidding

Underbilling ties up a contractor's own cash by financing work the owner has not yet paid for, which strains cash flow and working capital across active jobs. Surety underwriters and lenders watch the underbillings figure closely on the work-in-progress schedule, because chronic underbilling can signal poor billing discipline, slow change-order processing, or overstated future profit.

Example

Reviewing the monthly WIP report, a controller spots a project showing costs in excess of billings, traces it to unsubmitted change order billings, and works with the PM to get those approved and invoiced so the company stops carrying the cost out of pocket.

Related Terms

OverbillingWork in Progress (WIP)BillingCash Flow

Frequently Asked Questions

Underbilling means the contractor has spent money on completed work it hasn't invoiced, so it is effectively lending the owner that amount and funding it from its own cash. Across several jobs this drains working capital, increases reliance on credit lines, and can constrain the ability to take on new work.
Bill promptly and accurately by keeping the schedule of values current, submitting change order billings as soon as they are approved, and reconciling progress billings to actual work in place each period. Tightening the pay application cycle and tracking unapproved change orders prevents completed costs from sitting uninvoiced on the books.
Sureties review the work-in-progress schedule and treat persistent underbilling as a caution sign. It can indicate billing or paperwork weaknesses, delayed change order management, or profit projected but not yet earned. Clean, consistent billing relative to cost supports stronger bonding capacity and more favorable underwriting.

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