By Deepa Bhat, CPA, CFE, ACA, Principal, Assurance & Advisory
ASL Construction Group
How often have we heard the phrase “Cash is King”? So, following that logic, one would think an overbilled contractor is in an advantageous position. That is generally true assuming the following conditions are met:
- The billed Accounts Receivable representing such overbillings is collected or collectible;
- The overbillings are represented by cash on the Company’s balance sheet and are available for future cash outlays to pay for the work that has already been billed;
- Contractor estimates are conservative, i.e. projected margins will be achieved.
If these assumptions are not maintained, overbillings are not viewed favorably.
Conversely, underbillings (monies that will be recouped as the contract progresses to completion) are viewed suspiciously by third party users of the financial statements. Underbillings can be an unfavorable asset if the following conditions are true:
- Contractor has an aggressive gross margin estimate and the unbilled/underbilled costs represent unapproved change orders that may not be collected.
- Inventoriable costs may be included prematurely in job cost
It is important to understand the nature of these accounts unique to construction accounting and manage the Company’s cash flows accordingly. ASL’s Construction Niche is always available to help guide you through these concepts. Please contact us if you have any questions.