Why Construction Companies Get Stuck in the Underbilling Cycle

In the competitive world of construction, managing finances accurately is as crucial as laying a strong foundation for a building. Thus, many construction owners find themselves stuck in the underbilling cycle, a challenge that undermines financial success. In this blog, we explore the main reasons why construction companies often get stuck in this cycle and offer insights step by step to solve these struggles. 

What is Underbilling? 

Underbilling occurs when a company or individual charges less than the actual amount owed for a product or service provided. This can happen unintentionally due to various reasons, or even intentionally as a strategic discount.

The consequences of construction underbillings can be severe, impacting their profitability and ability to take on future projects.  However, underbilling can also negatively impact the owner. It will lead to project delays or budget overruns if additional costs need to be renegotiated later.

Read more: What is underbill? What makes contractors underbill on their projects?

Main Causes Leading to Underbilling in Construction

Despite its effects on profitability, many construction companies find it difficult to break free from this cycle. Let's delve into some common reasons why: 

• Cost Estimating Challenges:  Creating accurate construction cost control estimates is an intricate process.  New or complex projects can be particularly difficult to scope. Underestimating labor hours, material costs, or unforeseen site conditions can lead to significant construction accounting underbilling.

• Pressure to Win Bids:  The competitive nature of the construction industry can lead to aggressive bidding practices. Companies might underestimate project costs to win contracts, setting themselves up for construction underbillings later. 

• Communication Breakdowns:  Ineffective communication between the construction company, subcontractors, and the owner can be a major cause of underbilling. Misunderstandings regarding project scope, change orders, and billing procedures can lead to missed charges or disputes.

Read more: Construction Finance: What is cash flow and why is cash flow management important?

Impacts of Underbilling on Construction Companies

The reasons for underbilling in construction not only disrupt the billing cycle but also have broader implications for the business:

• Financial Instability: Underbilling can lead to serious cash flow problems. When the money received does not cover the costs already incurred, it strains the financial health of the company, potentially delaying payments to suppliers and subcontractors and affecting the overall liquidity.

• Compromised Project Quality: When companies try to win contracts with super low bids (underbidding), they might feel pressure to cut corners later on to make ends meet financially. This means they might take shortcuts or use lower-quality materials to stay within their tight budget. This can lead to project quality, which not only damages the company’s reputation but may also result in costly reworks or legal disputes.

• Strained Client Relationships: Consistent underbilling due to communication issues or change order mismanagement can strain relationships with clients. This can lead to arguments about the final bill and project costs. These billing headaches can chip away at the trust you've built with your clients, making it harder to convince them to work with you again on future projects.

Strategies to Stop the Underbilling Drain:

Fortunately, there are concrete steps you can take to prevent underbilling and ensure profitable construction projects:

1. Detailed Cost Estimates: 

Invest time in creating meticulous construction cost control estimates that consider all project aspects, including labor, materials, equipment, permits, and potential contingencies.

2. Effective Change Order Management: 

Implement a system for documenting and tracking all project changes. Establish a clear process for obtaining your approval and adjusting the contract price accordingly.

3. Accurate Time Tracking: 

Utilize timekeeping software or timesheets to meticulously track labor hours for all personnel involved in the project.

4. Real-Time Material Cost Monitoring: 

Closely monitor material costs throughout the project. Negotiate volume discounts with suppliers and factor in potential price fluctuations to maintain accurate billing.

5. Invest in Project Management Software: 

Consider implementing project management software that streamlines communication, task management, and cost tracking, fostering transparency and reducing the risk of underbilling.

Read more: Sage 100 Contractor vs QuickBooks - Features & Price Comparison

Conclusion: Breaking Free from the Underbilling

Understanding the root causes of underbilling and its impacts is the first step toward resolving this pervasive issue in the construction industry. Construction companies must refine their construction cost estimator techniques, manage client expectations more effectively from the bid stage, and enhance internal and external communication strategies.

For construction companies looking to break free from the cycle of underbilling, specialized bookkeeping services can be invaluable. At Construction Cost Accounting, we provide expert bookkeeping solutions tailored to the unique needs of the construction industry. Our services help ensure accurate financial tracking and reporting, and improve cash flow management. Partnering with us allows you to focus on what you do best – building impressive structures, while we take care of the financial intricacies.

Contact Construction Cost Accounting today to learn more about how we can help you overcome the challenges of underbilling and steer your projects toward greater profitability.