The first time I reviewed a new client's work-in-progress schedule, one job jumped off the page. It was roughly a $12 million contract with about $5 million in profit, a margin north of 40%.
That usually means something is wrong, so I pushed management hard on it. The numbers held. The job really was that good.
It still made me nervous.
The job was about $1.5 million overbilled, and the company didn't have enough cash in the bank to cover the overbillings.
Normally I'm an enthusiastic supporter of contractors billing on the aggressive side. Bill ahead when you can. Collecting cash before you have to pay for the work can make a big difference in a construction business.
But you have to keep track of how much of that cash is available to spend elsewhere.
Overbilling isn't profit
Overbilling means you've billed more than you've earned through the work completed to date. When the customer pays that bill, you have the cash. You still owe the work.
That distinction is easy to lose when you're looking at a healthy bank balance and a profitable WIP.
The cash is sitting in the same account you use for payroll, equipment, overhead, and the next job. You can spend it. Spending it doesn't remove the obligation to finish the work you've already billed.
That's what concerned me about this company. The margin held up under review, but some of the cash collected ahead of the work had already been used elsewhere in the business.
The job still needed to be finished.
The cash crunch came later
About six months later, the company hit a cash crunch.
They were very profitable and growing fast, and they were struggling to make the numbers work from week to week.
Growth was part of it. In my opinion, it wasn't the deciding factor. The deciding factor was spending money they had collected but hadn't yet earned.
They weathered it and have gone on to new heights. Plenty of contractors in that spot don't.
That's why I pay attention to overbillings even when the margins look good. A profitable job can still leave the company short of cash if the money needed to finish it has been spent somewhere else.
Read the WIP alongside the bank balance
When I review a WIP, I compare the overbillings to cash in the bank. If overbillings exceed cash, I want to understand where that money went and how the remaining work will be funded.
That comparison gives me a reason to ask more questions. A strong margin doesn't answer them.
How much work remains on the jobs you've billed ahead? What will it cost to finish? How much more can you bill and collect as that work gets done?
Those questions belong in the same conversation as job profitability. You need to understand both to decide how much cash you can put toward equipment, growth, or something else.
On this client's job, that 40% margin was real. So was the work they still had to finish.
They had collected cash ahead of that work and used it elsewhere in the business. A great margin didn't make that cash available twice.
Bill ahead when you can. But before you put that money toward something else, make sure you can still fund the job that brought it in.
If your jobs look profitable but cash is tight, your WIP deserves a closer look. Levvigo prepares your WIP schedule and walks you through what it says about job profitability, overbillings, and the work still to be funded. Learn about our WIP preparation service.
