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At their core, construction projects rely on cash flow. But it isn’t always simple—considering the complexity of projects and the fact that a company is likely managing multiple of them at once. Some projects take months or years to complete, and payments happen throughout the entire duration. With so many payments coming and going over the course of a project, it’s crucial for project teams to stay on top of daily progress and constantly evaluate where it stands financially. Otherwise, a project is at risk for being under or overbilled.
They may seem self-explanatory, but let’s get a few terms out of the way:
Overbilling occurs when a contractor is ahead of their progress and bills for contracted labor and materials before the work is completed. While this may help offset slow payments, it puts the contractor at risk of spending the extra money on something else if they don’t realize they’ve overbilled.
Underbilling happens when a contractor completes a certain amount of work on a project, but doesn’t bill for the full amount. This is typically the outcome of slow billing practices.
Both under and overbilling can lead to a state of negative cash flow, which can be detrimental to a construction company’s profitability and expected outcome on a project.
So, how does it happen?
Even before the project starts, money matters. If contractors are unable to correctly estimate project costs—or worse, underestimate their costs—it could set them up to be underbilled and out of cash before the project is completed. This deeply impacts their ability to make money (or at the very least break even) on the project, and it may go unnoticed until the very end when it’s too late.
If a contractor isn’t precise about what has been completed thus far, they will likely bill incorrectly. Trying to guess the percentage of completion could quickly cause them to over or underbill, and as a result the project’s entire budget will be at risk.
Construction is like a delicate dance, and poor project management could throw the entire routine off balance. Especially on bigger projects with multiple subcontractors, a disruption in one contractor’s ability to complete work could have a ripple effect on the entire project’s timeline and budget.
Effective project management allows a company to catch and correct any potential problems while holding everyone accountable for their part. If everything is settled at the end of the project, it’s already too late and nearly impossible to course correct.
