Billings in Excess of Cost

What does it mean

Billings in Excess of Costs is a figure that will show up on the balance sheet of a construction company.  This item can show up as either Costs in Excess of Billings (Asset) or Billings in Excess of Costs (Liability), and what the figure describes is how much costs the construction company has incurred on a particular project (proxy for amount of work completed on the project) compared to how much of the project has been billed to the end customer.  A construction company that has incurred more costs than they have billed the customer, will show an asset titled Costs in Excess of Billings.  If the construction company has billed out more of the project than they have incurred costs, a liability of Billings in Excess of Costs will show up.

Why does it matter

The reason this matters is because for a construction company, their billings are ultimately their revenue.  A construction company would prefer to have a small balance in the Billings in Excess of Costs rather than Costs in Excess of Billings because the customer is paid a little ahead on the project.  Why this is good is that the construction company needs to use less of their own money in the project; so they could use that money someplace else or pay back some on their operating line of credit.  

Things to look out for would be excessive balances in either of these categories.  A high degree of Billings in Excess of Costs (customer paid ahead) when coupled with low or negative profitability means the construction company may be supplementing their losses by billings their customers farther and farther ahead on their projects.  This is not sustainable long term (especially if the borrower has seasonal operations because there will be a period of time when there is no new projects to bill ahead on and at the same time the existing projects still need to finish (and there may not be enough billings left to cover the future costs).

A company with a high amount of Costs in Excess of Billings (company has net more to receive on a project than to send out in future costs), has the enviable position of having more billings left than costs, but if this is an excessive amount, the borrower has likely had to tie up additional capital to reach that point (had to spend more of their own money rather than the customer’s money).  This has two primary risks: tying up more of their own money has caused unnecessary borrowings (interest expense) and secondly they have more risk in the customer being able to pay their bills because if they can’t, the construction company already has a bunch of money invested in the project that they may not get paid back for.

Other Relevant Terms

• Capital
• Balance Sheet
• Return to Terminology Library