Common Underbilling Scenarios: Scenario(s) 4

On to Scenario 4 or the "Going through the punch list” scenario. Keep your subsequent activity nearby for this scenario.

In the example above (4) we are 100% complete, meaning there is zero cost to complete on the project. However, we still have $17,000 left to bill out (357,000 contract amount minus 340,000 billed to date) and are $17,000 underbilled. FYI, with the underbilling, we will be recognizing all the revenue in the current year. Meaning when we bill out the remainder of the project, it will be offset by the reversal of this underbilling, leaving zero revenues for the following year for this project.   

This is a common scenario I encounter with varying amounts for underbillings. The expectation is that the underbilling remains reasonably low relative to the total contract amount. What’s considered reasonable needs to be evaluated on a case-by-case basis. If the underbilling in this scenario was $30,000 or more, I would ask more questions regarding the estimates. Meaning, I would ask if the total contract price is too high? Do we need to decrease it, thus decreasing the underbilling? The quickest way to resolve the accuracy of the underbilling in this scenario is to look over subsequent activity.

Different scenarios with subsequent activity:

1. Remaining amount billed after year end- This is the ideal scenario when it comes to evaluating subsequent activity because it substantiates your underbilling. If you look at subsequent activity and see that $17,000 was billed in January or February of the following year, we’re good.

2. Remaining amount not billed after year end- The remaining amount, in our example $17,000 has not been billed yet but it’s February. Even though it hasn’t been billed yet we hope that we have a strong case keeping the contract price the same. If a lower amount will be billed instead of the $17,000 in the following year, we need to decrease the contract amount so the difference between the contract amount and billings to date equals the amount billed after year end, which in turn will decrease the underbilling. Hope that made sense!  

Thanks!

Ara