What Is Underbilling in Construction?

By Martin · Updated 2026-02-02
Underbilling (also called 'costs in excess of billings') occurs when you've performed more work than you've billed for. It appears as an asset on your balance sheet — money you're owed but haven't invoiced. While it technically means you have future billing capacity, chronic underbilling ties up working capital, strains cash flow, and tells your surety you're not managing your billing cycle effectively.

Why This Matters

Underbilling is one of the most common — and most overlooked — cash flow problems in construction. It means you've done the work, you've incurred the costs, but you haven't billed the customer yet. You're essentially financing your client's project with your own working capital.

I've seen $15M contractors carrying $400K-$600K in underbilling across their portfolio without realizing it. That's a half million dollars of their own money tied up in work they've already performed. Meanwhile they're drawing on their line of credit to make payroll — paying interest on money they should have already collected.

How Underbilling Happens

The math is simple. Take a $2M project:

You've earned $1M in revenue but only billed $750K. The $250K gap is money you're owed but haven't invoiced. It shows up on your balance sheet as "costs in excess of billings" — an asset, technically, but one you can't spend until you bill it and collect it.

The Five Common Causes

1. Billing lag You complete work in March, submit your pay application April 5th, it gets approved April 20th, and you get paid May 15th. Meanwhile you've done another six weeks of work. The structural lag between performing work and billing for it creates chronic underbilling, especially on fast-moving jobs.

2. PM not submitting pay apps on time This is the most frustrating cause because it's entirely preventable. The PM is busy running the job and puts off the billing paperwork. Every week they delay is another week of self-financed work. I've seen PMs let 60-90 days of billings stack up because they were "too busy" to do the paperwork.

3. Disputed or held billings The owner disputes a line item, so billing on the entire pay app gets held up. Or the GC withholds payment on a sub because of a quality issue on one small scope. The dispute might be over $15K, but it freezes $200K in billings.

4. Change order work performed before approval You did the extra work because the owner asked for it. But the change order isn't signed yet, so you can't bill for it. Meanwhile you've spent $80K in labor and materials on work that's sitting in limbo. This is one of the fastest ways to build an underbilled position.

5. Percentage of completion estimates not updated If your cost-to-complete estimate is stale, your percent complete calculation is wrong, and your billing might not reflect actual progress. You could be further along than the numbers show, which means you should be billing more.

Why Chronic Underbilling Is Dangerous

It kills cash flow. Every dollar of underbilling is a dollar you've spent but haven't collected. At $300K underbilled, you're effectively giving your clients a $300K interest-free loan. Your line of credit balance goes up to cover the gap, and you're paying interest on money someone owes you.

It reduces bonding capacity. Sureties look at underbilling as a sign of weak billing discipline or potential margin problems. Large underbilled positions make them nervous — are you really going to collect all of that? Is the work actually worth what you think it is? Chronic underbilling can cost you 10-20% of your potential bonding capacity.

It masks problems. A job that's underbilled might be underbilled because the PM knows the owner won't approve the billing — because the work has quality issues, or the scope is disputed, or the job is behind schedule. Underbilling can be a red flag for deeper project problems that nobody wants to surface.

It creates year-end tax issues. Under percentage-of-completion accounting, you recognize revenue based on work performed, not billings collected. So you might owe taxes on $1M of earned revenue even though you've only collected $750K. The underbilled $250K is taxable income that hasn't turned into cash yet.

How Much Underbilling Is Acceptable?

Some underbilling is normal. The billing cycle creates structural lag, and you'll always have some gap between work performed and billings submitted.

Healthy range: Underbilling of 5-10% of costs incurred on individual jobs is normal, especially early in the billing cycle or during fast-paced phases.

Warning zone: Underbilling of 10-20% of costs incurred. This suggests billing discipline issues or disputes that need attention.

Danger zone: Underbilling above 20% of costs incurred, or a growing underbilled position month-over-month. This is either a billing process failure or a sign that the job has problems the PM isn't surfacing.

At the portfolio level, your net position matters most. If you're underbilled on half your jobs and overbilled on the other half, the net might be fine. But if you're net underbilled across the portfolio by more than 5-8% of total costs, you have a systemic billing problem.

How to Fix It

Tighten billing cycles. Bill weekly or biweekly instead of monthly if the contract allows it. The shorter the cycle between performing work and submitting a bill, the less underbilling accumulates.

Set billing deadlines for PMs. Pay applications are due on the 1st — no exceptions. If the PM doesn't submit, it gets escalated. Treat billing like payroll: it doesn't get pushed back.

Submit change orders immediately. Don't wait to "bundle" change orders. Submit them as they occur. Every week of delay on a change order is a week of self-financed work.

Review underbilling in your monthly WIP. Flag any job that's underbilled by more than 10% and have a conversation with the PM. Why are we behind on billing? Is there a dispute? Is the work actually complete?

Separate retainage from underbilling. Retainage is held by contract — you can't bill it until completion. Don't confuse contractual retainage with billing you should have submitted but didn't. Track them separately.

The Bottom Line

Underbilling is money you've earned but haven't collected. Every dollar of it is cash trapped in your WIP that should be in your bank account. While some underbilling is structural and unavoidable, chronic or growing underbilling is a cash flow drain that weakens your balance sheet and limits your growth.

Track it monthly. Set billing deadlines. Submit change orders on time. And when you see underbilling creeping up, treat it as urgently as you'd treat a cash shortfall — because that's exactly what it is.

For the complete picture on how overbilling and underbilling interact, see Overbilling vs. Underbilling Explained.