Man climbing a rope
“Billing above costs” is a term used in financial accounting to refer to situations where the amount billed to the customer exceeds the revenue actually earned. Until these revenues are earned, they are recorded as liabilities in the company’s accounting books. This type of overbilling situation often occurs in industries where it is common to charge for services in advance, such as construction.
One of the most common examples of how this term is used is in the billing process used by many contractors. In this scenario, it is not uncommon for a contractor to charge clients up front for work that has been contracted for but not yet completed. The understanding is that the work is completed within a reasonable time. Meanwhile, the invoiced accounts receivable will be greater than the actual revenue earned and will be recorded as a liability in the contractor’s financial records. As work is completed and income is considered earned, the amount decreases until it is no longer classified as a liability.
Providers sometimes use billing above cost as a means of controlling expenses and avoiding the need to use credit or borrow money to pay for needed materials up front. By securing some up-front payment from clients, these funds can be used to cover all costs associated with the job, as the money is available to pay for labor, materials, or any other tasks relevant to the completion of the job. When properly managed, this means that once the project is complete, there are no remaining costs to liquidate and any profit that is generated in addition to labor expenses is available to the supplier.
While this practice is accepted in many industries, this approach creates a need to carefully manage the billing associated with each customer in ways that would not be necessary if the billing occurred at the time the money was actually earned. Care must be taken to track the progress of work or the provision of services so that liability is accurately reduced. Also, if the vendor has several different projects running simultaneously, they should avoid using the accumulated funds as a liability to purchase supplies for one job when, in fact, the revenue is associated with a different job. Failure to do so can quickly create a false picture of what work was and was not billed for a particular job, creating problems for both the customer and the vendor.