What do you understand from the word overbilling? It is some extra amount that is charged prior to the work being delivered.
In the construction industry, you will experience a lot of matters that may cause disputes. Overbilling is one of those matters. It actually happens when a contractor bounces a bill for the labor and material before the completion of the work.
Do you understand that? It may get clear from the example below:
Suppose a contractor has completed only 20% of his work, but he mentions the 30% charges of work to the client. This extra 10% actually creates overbilling over the project and material.
The overbill amount may comprise anything including the worker’s wages or rent of used earthmoving equipment. Although, overbilling has its own pros and cons that can be considered wisely before taking any step.
Pros of Overbilling
Generally, overbilled amounts are sometimes good for the construction project. In the construction industry, overbilling can be a good thing where the delay in payments is normal. In some cases, the customer releases payment but the bank system takes a little longer to clear the amount which causes a delay in payment.
A contractor charges and estimates the extra amount before the completion of work because he knows if the payment will not be done on time, it may create chaos with the vendors and workers. This way, the contractor stays a step ahead before anything bad happens.
Overbilling may also save a contractor from being late in project delivery. Sometimes the market fluctuates and the prices of materials change which may disturb the budget of the project. The contractor overbilled the amount so that the budget can be compensated and the workflow could not be disturbed.
Cons of Overbilling
Overbilling is not a pleasant thing every time. It may be a nightmare for a contractor in some cases. A construction contractor should be very careful while billing as it may lead to some hostile situations such as Job Borrow (running out of billing).
A company may fall into a job borrow condition when it gets overbilled than the estimated amount while the project is still continuing. The construction contractor may be in trouble when he runs out of billing due to the excess cash flow during the billing.
The company may go into negative amounts due to overbilling. Because their client keeps releasing the charges and they are left with less amount in the end while the project is not completed yet. In this case, the contractor has to face a lot of trouble. He may find alternative settlements to adjust the amount.
Overbilling, in the construction industry is a very common practice. The construction contractor overbills their clients or used earthmoving equipment rentals to keep the project flow. Sometimes it gives a positive result while sometimes it may cause big trouble for the contractors. A contractor should be very careful while billing the client. The pros of overbilling are that the project will not be disturbed due to the delayed payment. Whereas the negative impact occurs when the company goes into a negative cash flow. It happens due to uncertain conditions or fluctuations in the market over the prices of materials.